Friday, June 18, 2010

Birthday of Franco Modigliani

Modigliani may not be someone you're familiar with. But he won the 1985 Nobel Prize for Economics, along with Merton Miller. He was a co developer of what would come to be called the Modigliani-Miller theorem of corporate finance which states that under some circumstances, the debt-to-equity ratio of a firm (the amount of borrowed money vs. owner equity used to finance the firm) does not really matter.

While that may not be high on your list, this next item for which he was recognized is. If you teach personal finance or economics, you undoubtedly have heard of the life-cycle hypothesis. This states that because most people want their consumption level to be relatively smooth, they tend to save in high income years and to spend (dissave) in low income years (like retirement). That's something you probably use.  And if you don't you might want to consider using it.

If you're interested in learning more about Modigliani, I would suggest here and here.

1 comment:

Eric A said...

We just learned about Modigliani in my Corporate Finance class. Cool Post!