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New Developments on the Modigliani-Miller Theorem

Aboura, Sofiane; Lépinette, Emmanuel (2017), New Developments on the Modigliani-Miller Theorem, Theory of Probability and Its Applications, 61, 1, p. 3-14. 10.1137/S0040585X97T988010

Type
Article accepté pour publication ou publié
External document link
http://dx.doi.org/10.2139/ssrn.2569078
Date
2017
Journal name
Theory of Probability and Its Applications
Volume
61
Number
1
Publisher
SIAM
Pages
3-14
Publication identifier
10.1137/S0040585X97T988010
Metadata
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Author(s)
Aboura, Sofiane

Lépinette, Emmanuel
Abstract (EN)
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.
Subjects / Keywords
Regulation; Leverage; Absence of arbitrage opportunity; Banks; Modigliani-Miller
JEL
G3 - Corporate Finance and Governance
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Government Policy and Regulation

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