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

International Journal of Economics, Commerce and Management (IJECM), Vol. III, Issue 6, June 2015

11 Pages Posted: 27 Jun 2015

See all articles by Faruk Ahmeti

Faruk Ahmeti

FAMA University - Department of Management

Burim Prenaj

FAMA College

Date Written: June 2015

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 represent what could possibly be the most important theory for the structure of capital, through which they explain the effect of the capital structure for the value of companies. Despite the hard work by Modigliani and Miller and the entire time spent by numerous scholars in developing concepts regarding this theory, we can say that it still remains unclear and faces many objections. This paper attempts to assess and make a critical review of Modigliani and Miller’s Theory and the dominating literature that is pro and against this theory, aiming to identify the theory’s importance and contribute to the field modern finances. To this end, the paper assessed and analyses Modigliani and Miller’s theorem by considering the original work of authors Modigliani and Miller (1958, 1961 and 1963) as well as the dominating literature that covers this theorem, by mirroring the firmest opinions from different authors either pro or against. This paper aims to present the implications of Modigliani and Miller’s Theory, its importance and theoretical contribution.

Keywords: Modigliani and Miller’s Theorem, Capital’s Structure, Firm Value, Debt, Leverage

JEL Classification: E60, F30, G24, G31

Suggested Citation

Ahmeti, Faruk and Prenaj, Burim, A Critical Review of Modigliani and Miller’s Theorem of Capital Structure (June 2015). International Journal of Economics, Commerce and Management (IJECM), Vol. III, Issue 6, June 2015, Available at SSRN: https://ssrn.com/abstract=2623543

Faruk Ahmeti (Contact Author)

FAMA University - Department of Management ( email )

Prishtine, 10000
Kosovo

Burim Prenaj

FAMA College ( email )

Rr. Gustav Mayer
Nr. 7
Prishtine, 10000
Kosovo

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