Merton Miller
Encyclopedia
Merton Howard Miller was the co-author of the Modigliani-Miller theorem
which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic Sciences
in 1990, along with Harry Markowitz
and William Sharpe
. Miller spent most of his academic career at the University of Chicago Booth School of Business.
as an economist in the division of tax research of the Treasury Department, and received a Ph.D.
in economics from Johns Hopkins University
, 1952. His first academic appointment after receiving his doctorate was Visiting Assistant Lecturer at the London School of Economics
.
(now Carnegie Mellon University
), he collaborated with his colleague Franco Modigliani
there to write a paper on “The Cost of Capital, Corporate Finance and the Theory of Investment.” This paper urged a fundamental objection to the traditional view of corporate finance
, according to which a corporation can reduce its cost of capital
by finding the right debt-to-equity ratio. According to the Modigliani-Miller theorem
, on the other hand, there is no right ratio, so corporate managers should seek to minimize tax liability and maximize corporate net wealth, letting the debt ratio chips fall where they will.
The way in which they arrived at this conclusion made use of the "no arbitrage
" argument, i.e. the premise
that any state of affairs that will allow traders of any market instrument to create a riskless money machine will almost immediately disappear. They set the pattern for many arguments based on that premise in subsequent years.
Miller wrote or co-authored eight books. He became a fellow of the Econometric Society in 1975 and was president of the American Finance Association in 1976. He was on the faculty of the University of Chicago Graduate School of Business from 1961 until his retirement in 1993, although he continued teaching at the school for several more years.
His works formed the basis of the "Modigliani-Miller Financial Theory".
He served as a public director on the Chicago Board of Trade
1983-85 and the Chicago Mercantile Exchange
from 1990 until his death in Chicago
on June 3, 2000.
Modigliani-Miller theorem
The Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...
which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic Sciences
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...
in 1990, along with Harry Markowitz
Harry Markowitz
Harry Max Markowitz is an American economist and a recipient of the John von Neumann Theory Prize and the Nobel Memorial Prize in Economic Sciences....
and William Sharpe
William Forsyth Sharpe
William Forsyth Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University's Graduate School of Business and the winner of the 1990 Nobel Memorial Prize in Economic Sciences....
. Miller spent most of his academic career at the University of Chicago Booth School of Business.
Early years
Miller was born Jewish, in Boston, Massachusetts to Joel and Sylvia Miller, an attorney and housewife. He worked during World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
as an economist in the division of tax research of the Treasury Department, and received a Ph.D.
Doctor of Philosophy
Doctor of Philosophy, abbreviated as Ph.D., PhD, D.Phil., or DPhil , in English-speaking countries, is a postgraduate academic degree awarded by universities...
in economics from Johns Hopkins University
Johns Hopkins University
The Johns Hopkins University, commonly referred to as Johns Hopkins, JHU, or simply Hopkins, is a private research university based in Baltimore, Maryland, United States...
, 1952. His first academic appointment after receiving his doctorate was Visiting Assistant Lecturer at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
.
Career
In 1958, at Carnegie Institute of TechnologyCarnegie Institute of Technology
The Carnegie Institute of Technology , is the name for Carnegie Mellon University’s College of Engineering. It was first called the Carnegie Technical Schools, or Carnegie Tech, when it was founded in 1900 by Andrew Carnegie who intended to build a “first class technical school” in Pittsburgh,...
(now Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
), he collaborated with his colleague Franco Modigliani
Franco Modigliani
Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...
there to write a paper on “The Cost of Capital, Corporate Finance and the Theory of Investment.” This paper urged a fundamental objection to the traditional view of corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
, according to which a corporation can reduce its cost of capital
Cost of capital
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...
by finding the right debt-to-equity ratio. According to the Modigliani-Miller theorem
Modigliani-Miller theorem
The Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...
, on the other hand, there is no right ratio, so corporate managers should seek to minimize tax liability and maximize corporate net wealth, letting the debt ratio chips fall where they will.
The way in which they arrived at this conclusion made use of the "no arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
" argument, i.e. the premise
Premise
Premise can refer to:* Premise, a claim that is a reason for, or an objection against, some other claim as part of an argument...
that any state of affairs that will allow traders of any market instrument to create a riskless money machine will almost immediately disappear. They set the pattern for many arguments based on that premise in subsequent years.
Miller wrote or co-authored eight books. He became a fellow of the Econometric Society in 1975 and was president of the American Finance Association in 1976. He was on the faculty of the University of Chicago Graduate School of Business from 1961 until his retirement in 1993, although he continued teaching at the school for several more years.
His works formed the basis of the "Modigliani-Miller Financial Theory".
He served as a public director on the Chicago Board of Trade
Chicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
1983-85 and the Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
from 1990 until his death in Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
on June 3, 2000.
Personal life
Miller was married to Eleanor Miller, who died in 1969. He was survived by his second wife, Katherine Miller, and by three children from his first marriage and two grandsons. Three children by his first marriage: Pamela (1952), Margot (1955), and Louise (1958).See also
- List of economists
- List of Jewish Nobel laureates
- Modigliani-Miller theoremModigliani-Miller theoremThe Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...
- Eugene FamaEugene FamaEugene Francis "Gene" Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R...