New Developments on the Modigliani-Miller Theorem

16 Pages Posted: 25 Feb 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Emmanuel Lepinette

Université Paris-Dauphine - CEREMADE, CNRS

Date Written: February 24, 2015

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

Aboura, Sofiane and Lepinette, Emmanuel, New Developments on the Modigliani-Miller Theorem (February 24, 2015). Available at SSRN: https://ssrn.com/abstract=2569078 or http://dx.doi.org/10.2139/ssrn.2569078

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Emmanuel Lepinette (Contact Author)

Université Paris-Dauphine - CEREMADE, CNRS ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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