Modigliani-Miller made market-value maximization the test of corporate investment

Evidence

In the first contribution to finance theory discussed in chapter 2, Modigliani and Miller asked what it was that the managers of a corporation should be seen as maximizing. Their answer was the corporation’s market value: ”… any investment project and its concomitant financing plan must pass only the following test: Will the project, as financed, raise the market value of the firm’s shares? If so, it is worth undertaking; if not, its return is less than the marginal cost of capital to the firm.” (Modigliani and Miller 1958, p. 264) There is no reason to think that in emphasizing the maximization of market value Modigliani and Miller saw themselves as acting politically. — Donald MacKenzie, An Engine, Not a Camera, 1171

Categorization

• DEFINE: Establishes the precise M&M criterion — the single test a project must pass — which anchors the shareholder-value norm discussed throughout the book.
• XREF: connects to: Corporate value is unaffected by debt-versus-equity financing mix in perfect markets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 175; Modigliani and Miller’s 1958 paper supplied the objective function CAPM maximized. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 563; Finance theory’s investor-centric view shaped American corporate governance toward value maximization — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1173 (+6 more)

Broader Connections

• Finance theory’s investor-centric view shaped American corporate governance toward value maximization #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1173
• Modigliani-Miller propositions resist empirical testing because risk classes cannot be fixed #contradicts (0.85) — Donald MacKenzie, An Engine, Not a Camera, 389
• MBA-trained executives spread market-value maximization as a right and legitimate goal #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1177
• Regulation T’s margin limits undercut the arbitrage that Modigliani-Miller assumed #contradicts (0.75) — Donald MacKenzie, An Engine, Not a Camera, 194
• Investor-style valuation techniques now shape public policy with coercive force #expands (0.75) — Ève Chiapello, Financialisation of Valuation, 108
• Financialization theory links wage-compromise collapse and shareholder value to inequality #expands (0.70) — Natascha van der Zwan, Making Sense of Financialization, 109
• Finance creates intangible commodities that exist only through valuation techniques #expands (0.70) — Ève Chiapello, Financialisation of Valuation, 104