After the Revolution

To the financial practitioner, these ideas may sound somewhat unrealistic, but, as Modigliani and Miller said in their original paper, the ideas were meant to create a framework for discussion rather than be statements of absolute fact. "These and other drastic simplifications have been necessary in order to come to grips with the problem at all," they wrote. "Having served their purpose, they can now be relaxed in the direction of greater realism and relevance, a task in which we hope others interested in this area will wish to share."

And share they have.

----------------------------------------------- --------------------------------- M&M's Legacy

What will be the legacy of the work of Modigliani and Miller? One implication that has almost gone unnoticed is the modern obsession with shareholder value. While academics have been busily proving that capital structure can affect shareholder value, few have questioned that shareholder- value creation itself is the goal of the corporation.

"The view which existed until the time our paper came out was that management was supposed to maximize profits," says Modigliani. "We replaced that concept with another one, maximizing the market value of the firm--you should do those things that the market likes. This concept has been very broadly used, and there is now a broad discussion that the goal of management is the maximization of market value."

Concurs Stewart C. Myers, co-author of Principles of Corporate Finance: "M&M sort of woke the field up and set a standard. If you are going to work in the field it is going to have be serious economics, and it has to take into account that there is a capital market out there. You can't spin theories about corporate finance without making it consistent with what is going on in capital markets."

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