Beyond Modigliani-Miller’s Propositions

Abstract

Modigliani-Miller’s Propositions on business financing have become the usual paradigm on this subject: the main
reason to prefer bonds and other liability instruments instead of shares consists of the “tax shield†provided by
income tax savings on interests. The aim of this paper is providing a refutation for that concept and pointing out a
basis for an alternative theory. A light refutation about tax shield may consist of the differences of taxation regimes
in different countries and their subsequent changes. But this paper develops a strong refutation: tax shield is not
the core variable in a general theory of financing.