Miller, Merton H (1923–2000)

US economist. Miller shared the Nobel Prize for Economics in 1990 with US economists Harry Markowitz and William Sharpe for pioneering theories on management investment portfolios and corporate finance, the supply rather than the demand for securities.

The subject of corporate finance is focused on the question of how firms can best raise capital. The problem is a familiar trade-off problem: if the firm incurs new debt by borrowing, it suffers a fixed cost; if it instead issues new equity, it dilutes the value of the shares of existing shareholders. The issue is: what is the relationship between a firm's market value and its debt-equity ratio? The Modigliani-Miller theorem asserts, surprisingly, that under perfect competition and the absence of taxes, the market value of a firm is independent both of its debt-equity ratio and its dividend-payout ratio. Taxes, at least in the USA, favour debt rather than dividends and hence the tax system is the simplest reason why debt and equity are not perfect substitutes as the Modigliani-Miller ‘irrelevance’ theorem implies. But transaction costs, the costs of bankruptcy, and asymmetric information between banks and stockbrokers might be other reasons why the theorem is not directly observable. Nevertheless, it remains a perfect example of how descriptively false theorems in a subject like economics may simply illuminate real-world phenomena.

Graduating from Harvard in 1944, Miller went on to complete a PhD at Johns Hopkins University. His first academic post was held at Carnegie Tech, teaching economic history and public finance, and his interest in corporate finance developed gradually in the 1950s. He joined the Graduate School of Business of the University of Chicago in 1965 and remained there as a professor of banking and finance until his retirement in 1981. He was elected president of the American Finance Association in 1976.