Franco Modigliani has become internationally recognized
for his life-cycle theory of personal savings and their impact on national
economics, and for the development of the modern theory of corporate
finance. His work on the corporate
finance theory explains how investors mix their portfolios to balance out
expected risks and returns, leading to an understanding of the real forces
which affect a company’s value.
The Nobel Committee recognized Professor Modigliani “for his
pioneering analyses of saving and of financial markets.”
Quotes from Franco Modigliani’s March 1987 lecture at
In addition it was
around 1957 that Merton Miller and I produced our two papers, the so-called
Modigliani-Miller theorems, which have come to be known as Mo-Mi and
Mi-Mo. Mo-Mi is the proposition that the
financial structure (debt-equity ratio) of a firm in a perfect capital market
has no effect on its market valuation.
This paper has since become quite well known, and it has been assigned
to students in business and finance all over the world. And I regret that this is the case because
students who read this paper usually come out hating me. They think it’s a terrible paper, a very hard
one to understand – and they are right.
The reason is that this paper was never meant for students. The paper was meant to upset my colleagues in
finance by arguing that the core issue that received most attention in
corporation finance, namely finding out what exactly is the optimum capital
structure, was not really an issue. It
didn’t make any difference.
As I contemplate my
contributions, I find one unifying thread: a propensity to swim against the
current by challenging the self-evident orthodoxies of the moment, be it that the
classics are altogether outdated, or that the rich must save a larger fraction
of their income than the poor, or that debt financing is cheaper because the
interest rate on high-quality debt is lower than the return on equity. I would love to be able to continue to play
that role. But I don’t want to think too
much about where I am going. I just like
to let things come and be ready to jump in where there is excitement.
Additional resources on Franco
Modigliani are available at the Nobel web
site.