Capital structure irrelevance principle
From Wikipedia, the free encyclopedia
The Capital Structure Irrelevance Principle in economics was developed by Franco Modigliani and Merton H. Miller. Modigliani and Miller asserted that the costs of raising capital for a corporation by selling more stock (equity), or issuing more bonds (debt), should be equal; thus a corporation's value in the stock market is independent of its capital structure, calling this the "irrelevance principle". It is one manifestation of the Modigliani-Miller theorem
Miller's analogy of the principle uses a pizza: For a given sized pizza the number of pieces into which it can be cut does not change the underlying amount of pizza.[citation needed]
Later, Miller added refinements such as the effects of a nation's tax structures and bankruptcy policies to the relationship between a company's capital structure, dividend policies, and market value.[citation needed]
Modigliani won the 1985 Nobel Prize in Economics for this and other contributions.
Miller won the 1990 Nobel Prize in Economics, along with Harry Markowitz and William Sharpe, for their "work in the theory of financial economics," with Miller specifically cited for "fundamental contributions to the theory of corporate finance."
