Estructura De Capitales

American Finance Association

Debt, Dividend Policy, Taxes, Inflation and Market Valuation Author(s): Franco Modigliani Reviewed work(s): Source: The Journal of Finance, Vol. 37, No. 2, Papers and Proceedings of the Fortieth Annual Meeting of the American Finance Association, Washington, D.C., December 28-30, 1981 (May, 1982), pp. 255-273 Published by: Blackwell Publishing for the AmericanFinance Association Stable URL: http://www.jstor.org/stable/2327325 . Accessed: 08/06/2012 14:14
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THE JOURNAL OF FINANCE *VOL. XXXVII, NO. 2 * MAY 1982

The
VOL. XXXVII

journal

of

FINANCE
No. 2

MAY 1982

Debt, Dividend Policy, Taxes, Inflation and Market Valuation
FRANCO MODIGLIANI* I. Introduction
IN THIS CONTRIBUTION, I propose to go once more over two "core issues" of corporate finance-how do leverage and dividend policy affect market valuation? These are issues that were supposed to have beensettled in the two contributions that students often refer to as MoMi (Modigliani and Miller [1958]) and MiMo (Miller and Modigliani [1961]). The basic message in these papers, was that with rational investors, well functioning markets, and no taxes (or at most, only of a certain type), financial policy does not matter! But that conclusion did not carry over to a world with taxes, which have been,and still are, a continuing source of trouble. After a false start in MoMi, the MM "Correction" [1963], on the assumption that (i) all corporate returns are taxed equally at the personal level, and (ii) the tax saving from the use of debt can be regarded as a perpetual riskless flow, concluded that each dollar of debt in the capital structure should add to the market value of the firm at a rateequal to the corporate income tax. The gain from leverage results, derived from the demand-side analysis, in turn created immediate problems. If debt is valuable, why should firms not be financed as nearly as possible by debt alone, with the optimum leverage representing a corner solution? This implication was disturbing because it was both counterfactual and against common sense. Accordingly, ithas given rise to a good deal of work focussing on the supply side. This analysis has uncovered and analyzed four major ways in which leverage could unfavorably affect the market value of the firm: (i) the most obvious and traditional is through bankruptcy costs which reduce the expected flow to all concerned (numerous references, beginning with 1967, are provided in Williamson [1981], p. 18); (ii)a second is through agency costs, resulting from the arrangements needed to protect the creditors (Jensen
* Massachusetts Institute of Technology. The material for this paper is based upon work supported in part by the National Science Foundation under Grant SES 7926733. The author wishes to express his appreciation to Terry Marsh, Lucas Papademos, Julio Rotemberg and Robert Shiller for readingan earlier draft of the manuscript and making valuable suggestions. I have also benefited from the advice of Fischer Black, Robert Merton and Stewart Myers.

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and Meckling [1976]; Chen and Kim [1979]); (iii) the third, and most sophisticated way, is what might be called moral hazard or foregone valuable opportunities (Myers [1977]) which would be...