Thanks to commenter Daniel Davies, I have changed an incorrect word in my Modigliani-Miller essay. It now reads
Before MM, the conventional wisdom was that highly-levered firms (firms that issue a lot of debt relative to equity) offered their investors higher risks and higher expected returns than less-levered firms. MM said that financial structure was essentially irrelevant.
Before, it read “shareholders” instead of investors, which is wrong. “Investors” includes both shareholders and bondholders.
I also think I could have better described the “conventional wisdom” pre-MM. The “conventional wisdom” was that a highly-levered firm could appeal to the risk-tolerant investor and that a relatively unlevered firm could appeal a risk-averse investor. MM showed that this not the case, because investors in levered firms can dial down their risk by owning the bonds issued by those firms.
READER COMMENTS
Patrick R. Sullivan
Aug 3 2005 at 11:30am
Also, don’t you mean ‘leveraged’?
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