MM, Coase, and Corporate Finance

Despite cosmetic similarities, the Modigliani-Miller and Coase Theorems provide conceptually distinct insights for analysis of corporate financial policy and governance that are driven by substantively different economic considerations, with neither theorem a special case of the other. Coase’s main lesson is the existence of opportunity-cost pressure toward allocative efficiency, which in a corporate context means pressure to increase firm value. Such pressure plays no role in the MM Theorem, which indicates that financial policy is indeterminate (because all choices are equally valuable) and whose main lesson is that investment policy is the foundational driver of firm value.