报告题目 | Financial Diversification Irrelevancy vs. the Modigliani-Miller Propositions |
报告人（单位） | 张国平 教授（西安交通大学） |
点评人（单位） | 刘晓星 教授，尹威 副教授（东南大学） |
会议地点 | 2022年8月12日下午2:00；腾讯会议ID：623-228-820 |
报告内容提要 | |
In their famous and influential article in 1958, Modigliani and Miller present two propositions: First, the market value of any firm is independent of its capital structure, and second, the expected rate of return on the equity of the levered firm increases in proportion to the debt-equity ratio. It is now well-accepted in the literature that the Modigliani-Miller first proposition hinges on the assumption that “individuals and corporations can borrow at the same rate”, and the Modigliani-Miller second proposition holds because the equityholders of the levered firm require “a (risk) premium related to financial risk equal to the debt-to-equity ratio times the spread between the expected rate of return on the firm’s total assets and the expected rate of return on the debt”. Here, we will show that the Modigliani-Miller first proposition is a special example of financial diversification irrelevancy, which can hold in an economy where there is no capital market for lending and borrowing, and there is no need to assume that individuals and corporations can borrow at the same rate. We will also discuss the fallacious arguments for the Modigliani-Miller second proposition. Especially, we find that under the binomial probability distribution, for the levered firm, (i) under riskless debt, increasing the debt-equity ratio increases the variance of the rate of return on equity and has no effect on the rate of return on debt; and (ii) under risky debt, increasing the debt-equity ratio increases the variance of the rate of return on debt but does not affect the probability density function of the rate of return on equity. That is, the Modigliani-Miller second proposition does not hold. | |
张国平教授是西安交通大学金禾经济研究中心教授、博士生导师。Dr. Chang, Kuo-Ping is a professor at the Jinhe Center for Economic Research, Xi’an Jiao Tong University. He graduated from University of Pennsylvania with a Ph.D in economics and finance. He has authored four books, and published various papers in prominent journals such as Management Science, European Journal of Operational Research, Journal of Regulatory Economics, Energy Economics and Applied Financial Economics. His research interests are corporate finance, industrial organization, and derivatives pricing. Professor Chang’s recent new book: The Ownership of the Firm, Corporate Finance, and Derivatives: Some Critical Thinking, Springer, New York, 2015, clarifies the errors and misinterpretations in the literature
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