Perfect Market, Arbitrage, and Value Creation in the MM Proposition

22 Pages Posted: 24 Apr 2020 Last revised: 5 Nov 2021

Date Written: November 3, 2021

Abstract

The real contributions of the Modigliani-Miller (MM) Proposition are its central assumptions of perfect capital markets and the associated arbitrage argument. To explain the evolution of the understanding of arbitrage from a deterministic world into an uncertain world, we restate and comment on the proofs of the MM Proposition in current perspectives. With the no-arbitrage principle in mind, we clearly read the circular justification in the MM Proposition and the misleading concept of cost of equity. From the perspective of the distribution of a corporation's value creation, we find that shareholders prefer a maximum degree of debt.

Keywords: Perfect Market, No-Arbitrage Principle, Capital Structure, Value-Added Ratio, Cost of Equity

JEL Classification: G12, G32, D24

Suggested Citation

Abad, Pharos, Perfect Market, Arbitrage, and Value Creation in the MM Proposition (November 3, 2021). Available at SSRN: https://ssrn.com/abstract=3554322 or http://dx.doi.org/10.2139/ssrn.3554322

Pharos Abad (Contact Author)

Ping-Tang University ( email )

China

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