The M-M debate hinged on whether arbitrage could overcome institutional restrictions

Evidence

What divided Modigliani and Miller from Durand was at root whether market processes, in particular arbitrage, were strong enough to overcome the effects of institutional restrictions. Modigliani and Miller held that they were. Durand did not believe that, and he published an extensive critique of Modigliani and Miller’s claim of the irrelevance of capital structure. He did not deny the logic of their basic reasoning as noted above, he had himself explored the path they took but he claimed that their analysis held only in a “limited theoretical context.” The situation of what Durand called “real corporations” (1959, p. 640) was quite different, and the market they had to interact with was far from Modigliani and Miller’s assumption of perfection. — Donald MacKenzie, An Engine, Not a Camera, 193

Categorization

• DEFINE: Identifies the precise fault line — arbitrage strength vs. institutional restriction — that the whole capital-structure irrelevance debate hung on.
• XREF: Frames the ‘real corporations’ versus ‘perfect markets’ tension that recurs throughout performativity scholarship and economic sociology of finance. — connects to: Constrained arbitrage allows finance-theory models to diverge from actual prices. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1213; Regulation T’s margin limits undercut the arbitrage that Modigliani-Miller assumed — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 194; Market microstructure shapes whether arbitrage opportunities persist or vanish — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94 (+2 more)

Broader Connections

• Regulation T’s margin limits undercut the arbitrage that Modigliani-Miller assumed #corroborates (0.90) — Donald MacKenzie, An Engine, Not a Camera, 194
• Constrained arbitrage allows finance-theory models to diverge from actual prices. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1213
• Limited arbitrage capital can force abandonment of even certain-profit trades #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1217
• Market microstructure shapes whether arbitrage opportunities persist or vanish #expands (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94
• A small trigger can unravel large systems of overlapping arbitrage positions through forced selling #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 156