- Person
- Merton Miller
- Lived
- 1923–2000
- Field
- Corporate finance
- From
- American
The story
Merton Miller was born in Boston in 1923 to Jewish parents, Joel Miller, an attorney, and Sylvia Miller. After Harvard, wartime work in the Treasury’s tax research division and at the Federal Reserve, and a PhD from Johns Hopkins, he joined the Carnegie Institute of Technology in Pittsburgh, where his colleagues included Franco Modigliani.
In 1958 the two published “The Cost of Capital, Corporation Finance and the Theory of Investment”. At the time, managers and textbooks assumed that a company could lower its cost of capital and raise its value by choosing the right mix of debt and shares. Miller and Modigliani showed that, if there are no taxes or bankruptcy costs and investors can borrow on the same terms as firms, the mix does not matter: a firm’s value is set by the earnings its real investments produce. If borrowing more made a firm worth more, investors could copy the effect by borrowing themselves, and trading would erase the advantage. A 1961 paper extended the result, showing that, given its investments, a firm’s dividend policy also does not change its value. Miller compared it to selling cream separately from skim milk: the parts together fetch no more than the whole milk.
The importance of this “irrelevance” result lies in what it reveals. If financing or dividends do affect value in the real world, it must be because of taxes, bankruptcy costs or other specific imperfections, and Miller spent decades analysing exactly those. The Nobel committee, awarding him the 1990 prize, called the M&M theorems the natural basis for comparison in all theoretical and empirical work on corporate finance.
The University of Chicago, where Miller taught from 1961, said he helped change corporate financial practice from a loose collection of rules into a sophisticated approach to maximising shareholder value. The theorems are taught to every business student and still frame how companies decide whether to borrow or issue shares, how they set dividends and how analysts value them.
Why it matters
The Modigliani–Miller theorems give companies, investors and analysts the benchmark they use to decide how firms should be financed and valued.
About Merton Miller
Boston-born economist whose Modigliani–Miller theorems, worked out with Franco Modigliani, became the foundation of how companies are valued and financed. Nobel 1990.
Sources
- Press release: The Prize in Economics 1990 NobelPrize.org
- Merton Miller obituary University of Chicago Chronicle
- Merton H. Miller Econlib, The Concise Encyclopedia of Economics
- Merton Miller Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.