The original MM theory was put forward by Modigliani and Miller in America. (referred to as MM? ) Professor's basic viewpoints are expounded in the article Capital Structure, Corporate Finance and Capital published by American Economic Review from June 65438 to June 0958. The theory holds that the capital structure of a company has nothing to do with the market value of the company without considering the enterprise income tax and the same business risk but different capital structure. Or? When the company's debt ratio increases from zero to 100? %, the total cost of capital and the total value of enterprises will not change? That is, the enterprise value has nothing to do with whether the enterprise is in debt or not, and there is no optimal capital structure problem. Modified MM theory (capital structure theory including tax? )? , which is the basic idea of another paper related to capital structure published by MM in 1963 * *. They found out? Considering enterprise income tax, interest on liabilities is tax-free expenditure? , can reduce the comprehensive capital cost and increase the enterprise value. So what? As long as the company's financial leverage is increasing? And constantly reduce its capital cost, the more liabilities, the more obvious leverage, and the greater the company's value. When the debt capital is close to 100% in the capital structure, it is the best capital structure and the enterprise value reaches the maximum. The original MM theory and the modified MM theory are two extreme views on debt distribution in the capital structure theory. ?

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MM theory correlation 1: Miller model theory

Miller model is the basic idea expounded by Miller in the report made by American Finance Association 1976. This model modifies the modified MM theory with personal income tax. Think that the modified MM theory overestimates the return on debt? In fact, personal income tax offsets the interest income of personal investment to some extent? The personal income tax they paid is lost, and the company collects debts? The preferential treatment of enterprise income tax reduction is roughly the same. So Miller's model returned to the original MM theory.

MM Theory Correlation 2: Trade-off Model Theory

Theoretically? MM theory ignores two factors of modern society? : Financial constraint cost and agency cost? And as long as you operate with debt? , there may be financial constraints and agency costs. After considering the above two factors, the value of a indebted enterprise should be determined according to the following formula? : Use the value of indebted enterprises? = Debt-free enterprise value? +Use debt tax reduction income? -the present value of the expected cost of financial constraints-the expected present value of agency costs The above formula shows that debt can bring tax reduction effect to enterprises? , increase the value of the enterprise? ; But? With the increase of tax reduction income of debt? The present value of these two costs will also increase. The optimal capital structure of the company can only be determined by balancing the tax reduction income of liabilities with the financial constraints and agency costs caused by liabilities. That is, when the tax reduction income is equal to the sum of the present value of the two costs, the optimal capital structure should be the debt ratio.

Three Important Conclusions of Early MM Theory

Miller's "MM theory" is very different from the traditional financial theory, which has aroused great repercussions in the financial theory circle. The early "MM theory" ("irrelevant theory") includes the following three important conclusions:

1. Capital structure has nothing to do with capital cost and company value. "MM Theory" holds that if the enterprise income tax and bankruptcy risk are not considered, the capital market will fully develop and operate effectively, and the company's capital structure has nothing to do with the total capital cost and company value, or the change of the company's capital structure will not affect the company's weighted average total capital cost, nor will it affect the company's market value. This is because, although the cost of debt capital is low, with the increase of debt ratio, investors will demand higher rate of return. Therefore, the company's equity capital cost will also rise, that is to say, the reduced capital cost due to the increase of liabilities will be offset by the increase of equity capital cost, and more liabilities will not help to reduce the total capital cost.

2. Capital structure has nothing to do with company value. "MM Theory" holds that for listed companies, under the perfect capital market conditions, the free flow of capital to high-yield companies will eventually make the value of companies with different capital structures equal. For example, when Company A has no debt, its financial risk is low and its investment return rate is high, while Company B has more debt, greater financial risk and lower stock price, so its shareholders may sell its shares and buy the shares of Company A instead, in pursuit of higher investment return. This pursuit of high-yield capital flow will cause the share price of company A to rise in the short term and the share price of company B to fall, but in the long run, when investors find that the income from investing in company A with higher share price is still low. Therefore, "MM Theory" holds that if the total market value of stocks is used to measure the company value, then the company capital structure has nothing to do with the company value.

3. If the financing decision is separated from the investment decision, then the dividend policy of the company has nothing to do with the company value. "MM Theory" holds that the company value is completely determined by the profitability of the company's assets or portfolio, and the distribution ratio between dividends and retained earnings does not affect the company value, because dividend payment can temporarily increase the stock market price, but the company must expand financing for this purpose, which will increase the company's capital cost and financial risk, thus leading to the company's stock price decline, and the two will offset each other. Therefore, Miller believes that dividend policy can only reflect the relationship between current income and future expected income, but can not determine the stock market price or company value, which is also very different from traditional financial theory.

The premise of "MM theory" is a perfect capital market and the free flow of capital, regardless of corporate income tax. However, there is no perfect capital market in reality, and there are many factors that hinder capital flow, especially income tax. So later, Miller and others revised the "MM theory" to some extent. They believe that after considering the income tax factor, although the cost of equity capital will increase with the increase of debt ratio, the rate of increase will be slower than the increase of debt ratio. Therefore, the revised MM theory holds that after considering income tax, the higher the debt used by the company, the lower its weighted average cost, and the higher the company's income and even value. This is the modified MM theory, also known as the correlation theory of capital structure, capital cost and company value (referred to as "correlation theory").

According to the revised MM theory, the optimal capital structure of a company is 100% debt, but this situation is obviously unreasonable in modern society. Therefore, some scholars later introduced the market equilibrium theory, agency cost, financial cost (direct and indirect losses caused by insufficient solvency) and other factors to further improve the "MM theory". First of all, Stiglitz and others put the Market equilibrium theory (market? Equilibrium) introduces the study of capital structure. They think that increasing the debt ratio of the company will increase the financial risk and bankruptcy risk of the company, thus forcing the company to choose the second-best financing scheme instead of the financing scheme with the maximum debt ratio (100%). On the other hand, with the increase of the company's debt ratio, creditors demand higher interest rate returns because of greater risks, which will increase the cost of debt and increase the difficulty of financing, and will also limit the company's excessive debt. Later, some scholars introduced the theory of agency cost and financial constraint cost into the study of capital structure. The conclusion is that before the company's debt ratio reaches a certain limit (such as 50%), the tax reduction benefits brought by debt will greatly exceed the losses caused by the increase of equity capital cost. With the increase of debt ratio, the tax reduction income of debt will show a trade-off relationship with the increase of equity capital cost. After this point, the financial orange collection cost and agency cost will rise. When it reaches another peak (such as 80%), the marginal income of debt reduction just offsets the loss of debt increase (including the increase of equity cost, financial accounting cost and agency cost). After this peak, the loss of debt increase will exceed the tax reduction income of debt. Therefore, the capital structure is related to the company value, but the higher the debt, the better, which makes the capital structure theory more perfect.

Although the capital structure theory put forward by Professor Miller has certain preconditions and assumptions, it is of great significance to broaden people's horizons, promote the study of capital structure theory and even investment theory, and guide people to grasp the relationship between capital structure and capital cost, company value and dividend policy, and company value from a dynamic perspective. Therefore, MM theory is called "revolutionary change" and "the cornerstone of the whole modern enterprise capital structure theory" by western economists. As stated in the statement of the Swedish Academy of Royal Sciences when awarding the Nobel Prize in Economics to Miller, Sharp and markowitz (the latter two are also financial economists): Miller's pioneering work in financial economics has made great contributions to corporate financial theory, and the award is well deserved; The statement also said: Miller participated in the innovation of corporate financial code, transforming it from a series of loose rules into a code that can maximize shareholder value, which has far-reaching influence. Miller visited and lectured in Hong Kong many times before his death, especially during the Asian financial turmoil, which left a deep impression on people. Because of this, Hong Kong's "Intelligence News" commented on the news of Miller's death: "The fall of superstars has a lasting impact." ?

Morton Miller

Professor Miller was born in Boston, Massachusetts, USA on May 1923. In May 1943, he received a bachelor's degree in literature from Harvard University, and in May 1952, he received a doctorate from Hopkins University. His academic research activities began in the early 1950s after he entered Carnegie Institute of Technology (now Carnegie Mellon University). There, he met the most important partner in his academic career, that is, Professor Modig Lenny, who won the Nobel Prize in Economics in 1985, and published their immortal academic book "Capital Cost, Corporate Finance and Investment Theory" in 1958. Their cooperation-the famous MM group in the field of financial management-lasted until the mid-1960s. 196 1 year later, Professor Miller taught at the University of Chicago. Before1980s, Professor Miller's work mainly focused on the financial management of the company, which established his position as a master of financial management. It is generally believed that Professor Miller's pioneering work on the basis of modern corporate finance theory has completely changed the mode of investment decision-making and financing decision-making of enterprises. Modern corporate finance theory not only profoundly describes the problems existing in the financial and commercial fields, but also gradually forms them. Few branches of economic theory can be so close to the actual decision-making process of enterprise management.

Merton Miller, a professor of finance at Booth School of Business, University of Chicago, USA, died of cancer in Chicago on June 3 this year at the age of 77. Professor Miller 1923 was born in Boston, USA. He studied at Boston Latin School in middle school. 1940 entered Harvard University, and three years later obtained a Bachelor of Arts degree from Harvard University. During World War II, Miller worked in the Tax Research Department of the US Treasury and the Research and Statistics Department of the Federal Reserve. He entered Johns Hopkins University on 1949 and received his doctorate in economics on 1952. Later, he taught at the London School of Economics and Carnegie Mellon University. He started teaching at Booth School of Business at the University of Chicago in 19 1 and retired in 1993. Miller was 1983 during this period.

Professor Miller is a world-famous financier who has made great achievements in financial theory and published eight books. He devoted himself to the study of financial theory in his early days. Later, due to work reasons, his research scope also involved the supervision of securities and options trading, but his most outstanding contribution was in the theory of capital structure. He and another financial expert, Modig Lenny (Franco? Modigliani) in 1956 (The? Cost? Yes? Capital, company? Finance? And then what? That? Theory? Yes? Investment), this article was revised and published in the June issue of American Economic Review (1958). This paper puts forward that the value of a company depends on the investment portfolio, but has nothing to do with the capital structure and dividend policy (called "MM theory"). 196 1 co-published Victory Policy, Growth and Share Valuation with Modig Lenny. Policy? Grow up? And then what? That? Valuation? Yes? Shares), further elaborated and developed this theory, and thus won the 1990 Nobel Prize in Economics.

In the development of modern financial theory, MM's irrelevant theories-capital structure irrelevant theory and dividend irrelevant theory play an extremely core role. These two unrelated theories are not only the policy analysis of the company's capital structure decision and dividend policy, but also the in-depth and systematic analysis of important financial concepts such as enterprise value, capital cost, capital structure, cash flow and risk. No financial expert has made such precise and scientific research on the basic concepts in modern financial theory as Professor Miller, thus laying the foundation stone of modern financial management building.

The academic research work of Professor Miller and Professor Lenny of Modig has also made a major breakthrough in methodology, that is, introducing arbitrage-free proof into the analysis and demonstration process of financial theory, making it the basic analysis method of financial management. At present, more and more scholars have confirmed that it is impossible to fundamentally understand modern financial theory without understanding the arbitrage-free analysis method. In short, the so-called arbitrage refers to the process of obtaining profits without taking any risks, that is, buying low (buying undervalued stocks) and selling high (selling overvalued stocks) at the same time to realize profits. There is no doubt that buying will increase the price of undervalued goods, while selling will reduce the price of overvalued goods. If arbitrage activities can bring profits, then arbitrageurs will continue such activities. When the arbitrageur is unprofitable, the arbitrage activity will automatically terminate. At this point, the commodity price reflects its intrinsic value and the market reaches equilibrium. No-arbitrage analysis is a kind of equilibrium analysis, which combines research methods with the characteristics of financial activities. At present, in financial economics, this analysis method has completely replaced the marginal analysis method in traditional economics.

Since the mid-1990s, value-based management (VBM) has become popular in the international business community, and has been respected and adopted by many large multinational companies. Value-based enterprise management (Miller ·VBM) is a management system that is guided by the concept of maximizing enterprise value and supported by discounted cash flow model (DCFM), involving all levels, links and employees in the enterprise. The system integrates various elements such as expectation, measurement, control, motivation and even culture, which is the inevitable trend of enterprise management development under the economic and financial environment. Theoretically speaking, the theoretical basis of the value-based management model is the irrelevant theory of capital structure put forward by Professor MM 65438-0958.

What is the meaning of MM mode?

MM theory is the abbreviation of the capital structure model established by modigliani and Miller. ?

American economists Modi Griani and Miller put forward the original MM theory in the book Cost of Capital, Corporate Finance and Investment Management published in 1958. At this time, MM theory did not consider the impact of income tax. The conclusion is that the total value of an enterprise is not affected by the capital structure. Since then, the theory has been revised, adding the factor of income tax, and the conclusion is that the capital structure of an enterprise affects the total value of the enterprise. Debt management will bring tax saving effect to the company. This theory provides a useful starting point and analytical framework for the study of capital structure. ?

What are the two types of MM models?

There are two main types of MM theory: MM model without corporate tax and MM model with corporate tax. ?

1) MM theory points out that the total risk of all securities holders of a company will not change because of the change of capital structure. Therefore, regardless of the company's financing portfolio, the total value of the company must be the same. Is there arbitrage in the capital market? Now, it is an important support for this hypothesis. Arbitrage avoids the different prices of perfect substitutes in the same market. Complete substitution here refers to two or more people with the same risk but different capital structure? Company. MM theory holds that the total value of such companies should be equal. ?

You can use formulas to define the company value excluding corporate tax. The value of a company can be determined by converting its operating net profit into capital according to an appropriate capitalization ratio. The formula is:?

Vu = Wu =EBIT/K=EBIT/Ku?

Where VL is the value of a company with leverage and Vu is the value of a company without leverage; K=？ Ku is the appropriate capitalization ratio, that is, the discount rate; EBIT is net profit before interest and tax. ?

According to MM theory without corporate tax, corporate value has nothing to do with corporate capital structure. In other words, whether the company has liabilities or not, the weighted average cost of capital of the company is unchanged. ?

(2) MM theory holds that when there is corporate tax, the advantage of borrowing is that the interest payment of debt can be used to offset the tax, so financial leverage reduces the weighted average cost of capital after tax. ?

The present value of tax avoidance income can be expressed by the following formula:

Present value of tax avoidance income =tc*r*B/r=tc*B?

Where: tc is the corporate tax rate; R is the debt interest rate; B is the market value of debt. ?

Therefore, the more debt the company has, the greater the tax avoidance income and the greater the company value. Therefore, after adding corporate tax to the original MM model, it can be concluded that the existence of tax is an important manifestation of the imperfection of the capital market, and when the capital market is imperfect, the change of capital structure will affect the value of the company, that is, the company's? The value and cost of capital change with the change of capital structure. The value of leveraged companies will exceed that of non-leveraged companies (that is, the value of indebted companies will exceed that of non-indebted companies). The more debt, the greater the difference. When the debt reaches 65,438+000%, the company's value is the largest. ?

The development of MM theory holds that the higher the debt ratio of an enterprise, the better it is for the enterprise. When the debt ratio of an enterprise is 100%, the value of the enterprise is the largest. However, this analysis does not consider the bankruptcy cost of the enterprise, so the conclusion that the enterprise value is the largest because of the debt 100% is far from the economic reality. On this basis, the trade-off model in modern western capital structure theory introduces bankruptcy risk, which further improves the capital structure theory and makes it more practical, thus attracting the attention of all countries.