A Critical Review of Modigliani and Miller’s Theorem of Capital Structure

ArXiv ID: ssrn-2623543 “View on arXiv”

Authors: Unknown

Abstract

In their study “The cost of capital, corporation finance and the theory of investment” (1958) laureates of Nobel Price Nobel Franco Modigliani and Merton Miller

Keywords: Modigliani-Miller theorem, cost of capital, corporate finance, capital structure, investment theory, Corporate Equity

Complexity vs Empirical Score

• Math Complexity: 2.5/10
• Empirical Rigor: 1.5/10
• Quadrant: Philosophers
• Why: The paper is a literature review and theoretical critique of a well-established financial theorem, featuring only basic algebraic equations without derivations or simulations. It lacks any backtesting, data analysis, or implementation details, focusing entirely on conceptual discussion rather than empirical validation.

  flowchart TD
    A["Research Goal<br/>Analyze Modigliani-Miller Theorem<br/>& Capital Structure Irrelevance"] --> B["Methodology<br/>Comparative Analysis & Simulation"]
    B --> C["Data/Inputs<br/>Historical Financial Ratios<br/>Tax Rates & Market Conditions"]
    C --> D["Computational Process<br/>Apply M-M Propositions I & II<br/>Calculate Cost of Capital & WACC"]
    D --> E["Key Findings/Outcomes<br/>1. Capital Structure Irrelevance<br/>2. Impact of Taxes on Value<br/>3. Role of Market Efficiency"]