Abstract

http://ssrn.com/abstract=1727744
 
 

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On the Relevancy of Modigliani and Miller to Banking: A Parable and Some Observations


Paul C. Pfleiderer


Stanford Graduate School of Business

December 17, 2010

Rock Center for Corporate Governance at Stanford University Working Paper No. 93

Abstract:     
Discussions of bank capital regulation are often clouded by fundamental misunderstandings about how the insights presented over 50 years ago by Modigliani and Miller (M&M) relate to bank funding and the cost of bank equity. The claim is often made that banks are special and that the M&M insights do not apply in the banking context. This claim is misleading and false. The M&M insights, when properly interpreted, do apply to this discussion. These insights show that any analysis of capital regulation must be focused on how capital regulation rules affect the various frictions associated with funding and how this affects the social costs and benefits associated with the funding of banks. This short paper presents a parable that explains the relevance of M&M to banks and makes several observations about the errors and incorrect arguments that result when M&M insights are not properly recognized.

Number of Pages in PDF File: 9

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Date posted: December 17, 2010  

Suggested Citation

Pfleiderer, Paul C., On the Relevancy of Modigliani and Miller to Banking: A Parable and Some Observations (December 17, 2010). Rock Center for Corporate Governance at Stanford University Working Paper No. 93. Available at SSRN: http://ssrn.com/abstract=1727744 or http://dx.doi.org/10.2139/ssrn.1727744

Contact Information

Paul C. Pfleiderer (Contact Author)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-4495 (Phone)
650-725-7979 (Fax)

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