New Developments on the Modigliani-Miller Theorem
Aboura, Sofiane; Lépinette, Emmanuel (2017), New Developments on the Modigliani-Miller Theorem, Theory of Probability and Its Applications, 61, 1, p. 3-14. 10.1137/S0040585X97T988010
TypeArticle accepté pour publication ou publié
External document linkhttp://dx.doi.org/10.2139/ssrn.2569078
Journal nameTheory of Probability and Its Applications
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Abstract (EN)The seminal Modigliani-Miller (1958) theorem is a cornerstone of corporate finance theory. It provides conditions under which changes in a firm’s capital structure do not affect its fundamental value. A recent controversial debate around the relevancy of the Modigliani-Miller theorem regarding the banking sector has been raised since the 2008 financial crisis. In this paper, we provide an overview of the theorem with recent developments when considering several extensions of the initial model. We reformulate the Modigliani-Miller theorem under a Markowitz perspective. Under this approach, we consider the case of implicit government guarantees offered to banks. Our main result shows that a bank does not satisfy the Modigliani-Miller theorem, precisely banks will favor leverage instead of equity.
Subjects / KeywordsRegulation; Leverage; Absence of arbitrage opportunity; Banks; Modigliani-Miller
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