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M & M Theory: A Case Study

1167 Words5 Pages

Irrelevant and relevant theory
Modigliani and Miller (1958) illustrate that under certain key Assumption, firm’s value is unaffected by its capital structure. capital market is assume to be perfect in Modigliani and Miller theory, where insider and outsider have free access to information which is no transaction cost, bankruptcy cost and no taxation. Equity and debt choice become irrelevant and internal and external fund can be perfectly substituted. The M&M theory (1958) argues that the value of the firm should be depend on its capital structure. They also argue further that the firm should have the same market value and the same weighted Average Cost of capital at all capital structure level because the value of the company should depend on the return and on the company’s …show more content…

Majority of the studies have exposed positive result when observing on government relationship and performance or firm valuation. Berger and Patti (2006) have proved that there are positive relationship between capital structure and firm’s performance. According to the Cheng, Liu and Ch’in (2010), Margiritis and Psillaki and Park and Jang (2013) study, they found the reliable evidence of significant relationship between capital structure and firm performance that support the Berger and Patti statement.
Other studies reveal a negative relationship such as, (Antoniou, Abdul 2012), and Gueny and Paudyal which conducted same study and found that there is negative relationship between capital structure and firm performance. Regarding to their study, there are some determinant showed positive relationship between capital structure and firm performance and there are some showed negative relationship. From a recent study by Y.W Lau and C.Q.Tong this study empirically assesses the impact of government intervention on firm value in the context of the Malaysian

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