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http://www.jstor.org Mon Jun 18 15:27:02 2007
Joz~rnalof Eronom~cPerspectzl~e~ Volume 2, ,t'z~rnber 4- Fall 1.988-Pages -
Comment on the Modigliani-Miller Propositions
Stephen A. Ross
'hat a treat it is to have the opportunity to read Merton Miller's ruminations on the M M Propositions. If the view ofthe progress of science that interprets it as one of changing paradigms has ~nerit,hen surely the work t of Miller and Modigliani provides a laboratory example of a violently shifted paradigm. Through Miller's eyes we can recapture some of the flavor of how dramatic that change was. We are now so accustomed to the acceptance of the new paradigm that the older view that capital structure did matterhas about it the flavor of phlogiston. Not only does it seem wrong, it is difficult to believe that sensible folk could have held such beliefs. In fact, though, as with phlogiston, not merely did esteemed scholars subscribe to the view that capital structure did matter. the stubborn debate that followed the first publication of the MM papers attests to their devotion. Because economists now do lookat finance through the eyes of hlM, one of the contributions of a retrospective appraisal is that it affords us the opportunity to explore what, if anything, there was of value in the older view that we might have lost in our zeal to replace it. This is what Miller emphasizes when he says that "showing what doesn ' t matter can also show, by implication, what does." As their work has been recastin the shifting landscape of ever more modern theory. there is a danger that the original analysis will become discarded as "crude" or "naive." This would be a terrible mistake; the older analysis was designed less to verify some mathematical truism than to capture a live and elusive scientific intuition. Since the newer theory rests on a somewhat different base of intuitions. some of the olderinsights embedded in the original proofs and analysis may be lost. Miller's piece provides a n opportunity to do some excavating.
Stephen A. Ross is Sterling Professor of Econornirs and Finance, Iide School of 0rgnni:ation and iWanclgernenl, Y a k Chii~ersity. e:u Haren, Conneclicut. iV
,Journal of Economic Perspectives
A comment on Miller and Modigliani's work can easily become adiscussion of any facet of modern finance. T o avoid overlapping unnecessarily with the other comments, I will focus my dig in the two areas of arbitrage and taxation.
Since the original M M analysis economists have learned an enormous amount about the role played by no arbitrage conditions in financial markets. We have discarded the risk class based arbitrage arguments and...