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New Developments on the Modigliani-Miller Theorem

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Date
2017
Link to item file
http://dx.doi.org/10.2139/ssrn.2569078
Dewey
Economie financière
Sujet
Regulation; Leverage; Absence of arbitrage opportunity; Banks; Modigliani-Miller
JEL code
G3; G21; G28
Journal issue
Theory of Probability and Its Applications
Volume
61
Number
1
Publication date
2017
Article pages
3-14
Publisher
SIAM
DOI
http://dx.doi.org/10.1137/S0040585X97T988010
URI
https://basepub.dauphine.fr/handle/123456789/14729
Collections
  • DRM : Publications
  • CEREMADE : Publications
Metadata
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Author
Aboura, Sofiane
Lépinette, Emmanuel
Type
Article accepté pour publication ou publié
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.

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