Modigliani and Miller’s 1958 paper supplied the objective function CAPM maximized.

Evidence

Treynor first made a serious effort to solve the problem of how to discount uncertain cash flows in the summer of 1958. His parents owned a cottage in the Rocky Mountains, which they used to escape from the oppressive heat and humidity of the summers in Treynor’s native Iowa, and he joined them for a vacation from his job at Little that turned into a working holiday. He drove down from his parents’ cottage to the University of Denver to work in its library, and there he read Modigliani and Miller’s 1958 paper on the irrelevance of capital structure to total market value. In any problem in operations research it is necessary to know what one is seeking to maximize, and in Modigliani and Miller’s paper Treynor found his answer. — Donald MacKenzie, An Engine, Not a Camera, 563

Categorization

• XREF: The maximization-of-market-value objective links to the performativity thesis: the objective the model targets becomes what the market actually does. — connects to: Modigliani-Miller made market-value maximization the test of corporate investment — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1171

Broader Connections

• Modigliani-Miller made market-value maximization the test of corporate investment #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1171