Empirical failure to find an optimal capital structure helped birth the MM irrelevance theorem.

Evidence

As noted below, for Modigliani the spark was attendance at a 1950 conference organized by the National Bureau of Economic Research, at which he heard David Durand present the paper that became Durand 1952. As discussed in the text, Durand explored, but ultimately dismissed, the idea that capital structure might be irrelevant. Modigliani felt the proposition might hold despite Durand’s belief that it did not. (Modigliani’s own contribution to the meeting-Modigliani and Zeman 1952 was further from his eventual position than Durand’s paper.) It took Modigliani several years of occasional reflection on the problem to come up with “a really convincing proof” that the proposition held (Modigliani interview). When he did, lie described the proposition that capital structure was irrelevant to a class lie was teaching at Carnegie that Miller was also attending. “Merton Miller said `I have the evidence for you.”’ (Modigliani interview) Miller had set his graduate students the task of finding empirically the best capital structure from the viewpoint of minimizing a corporation’s cost of capital, and they had been unable to do so: “They couldn’t find any optimum.” (Miller interview) 7. — Donald MacKenzie, An Engine, Not a Camera, 1425

Categorization

• XREF: Connects to the performativity thesis: an empirical ‘failure to find’ became theoretical grounding for a model that later shaped practice. — connects to: Even failed empirical tests boosted finance theory’s credibility through testability itself. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 43; Empirical failure does not dislodge orthodox economists from their theory — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 722; A theorist’s trading failure can vindicate a pricing model — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1119 (+3 more)
• SEED: Angle: how a null empirical result (graduate students finding no optimum) became a foundational normative theorem in finance.

Broader Connections

• A theorist’s trading failure can vindicate a pricing model #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1119
• Empirical failure does not dislodge orthodox economists from their theory #expands (0.80) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 722
• The efficient market hypothesis survived every empirical refutation and became finance orthodoxy #exemplifies (0.78) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 758
• Empirical testing can only fail to disconfirm, never confirm, models like the CAPM #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 408
• An exception proves rather than refutes a paradigm’s dominance #expands (0.75) — Wael Hallaq, Restating Orientalism, 27