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New Developments on the Modigliani-Miller Theorem

Author

Listed:
  • Sofiane Aboura

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Sofiane Aboura, 2017. "New Developments on the Modigliani-Miller Theorem," Post-Print halshs-01348693, HAL.
    • Handle: RePEc:hal:journl:halshs-01348693
    as

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