Many that the amount of debt within a firm’s

Many years after, in 1958, Modigliani and
Miller (M&M) developed one of the most influential theories of capital
structure known as the irrelevance theorem I. In line with Paton’s (1922)
Entity Theory, M proposed that in a world without taxes the market value
of the firm is independent of its capital structure. M theorem 1 adds
that the total value of the firm is equal to the sum of the market values to
all suppliers of capital and is therefore unaffected by the size of debt to
equity used in its capital structure (Scott, 1976). They explained that the
amount of debt within a firm’s capital structure is subject to each individual
company and everyone is different, concluding that capital structure
irrelevant. This fundamental proposition indicates that the aptitude of
investors to engage in personal leverage is sufficient to ensure that leverage
itself cannot change the overall market value of the firm. This means that the
theorem enables conditions under which arbitrages by individual’s keeps the value
of the firm, depending only on cash flow generated by the investment policy
(Mondher, 2011). Moreover, M theorem 1 maintains that any increase in
profitability through higher leverage will be offset by an increase in the unit
cost of the remaining equity capital (Cline, 2015). Myrtle (1993) and
Frydenberg (2004) support the notion of M irrelevance theorem
(proposition I) that in complete and perfect capital markets, firm value is
independent of its capital structure and that an optimal capital structure does
not exist when capital markets are perfect with no taxes, no costs of
bankruptcy, together with agency costs. Subsequently Robichek (1966), Baxter
(1967), Bierman & Thomas (1972), Kraus & Litzenberg (1973), find
evidence that contradict M irrelevance theorem 1 that an internal optimal
capital structure can exist as there is no such existences as the perfect
market. Consistent with M researches Opler & Titman (1993) evidenced
that M theorem fails under a market with imperfections as in the real-world
taxes, bankruptcy and transaction costs, along with agency conflicts exist and
should be considered as major explanations for the corporate choice to use debt
financing. Gordon and Chamberlin (1994) largely support bankruptcy costs and
agency costs as determinants for an optimal capital structure and agreeing with
Titman (1993) therefore also finds evidence to contradict M irrelevance
theorem 1 under imperfect conditions (Gordon and Chamberlin, 1994, in Mondher,
2011).