Literature Review

Business Research Methods

Presented by: Neelima Kujur
ERP ID: 0231MBA068
MBA, Sec-B
Corporate Finance
 Introduction
• Corporate finance is the area of finance dealing with the sources of funding, the capital
structure of corporations, the actions that managers take to increase the value of the firm to
the shareholders, and the tools and analysis used to allocate financial resources. The primary
goal of corporate finance is to maximize shareholder value.
Some key aspects of corporate finance include:
• Capital Budgeting:
• Capital Structure
• Working Capital Management
• Sources of Funding
• Valuation
 Project objectives

To understand the To study the analyze how the principles explore the extent
concept of contribution of and propositions to which
Corporate Finance Miller and introduced by Miller and subsequent
in detail. Modigliani. Modigliani in their developments and
groundbreaking works advancements in
have shaped the theoretical finance
framework and practical
applications of corporate
finance
 Review
Many subsequent studies have built upon their framework, examining factors such as taxes,
bankruptcy costs, asymmetric information, and agency conflicts to provide a more nuanced
understanding of capital structure decisions. One key area of research inspired by Miller and
Modigliani's work is the trade-off theory, which posits that firms balance the benefits of debt
when determining their optimal capital structure. Other theories, such as the pecking order
theory and the signaling theory, also emerged in response to the limitations of the
Modigliani-Miller theorem. n addition to their contributions to capital structure theory, Miller
and Modigliani also made significant contributions to the theory of dividend policy. They
argued that, under certain conditions, dividend policy is irrelevant to firm value, as investors
can create their desired cash flows through homemade dividends.Overall, the legacy of
Miller and Modigliani in corporate finance is profound, as their work continues to shape the
way researchers, practitioners, and policymakers understand and analyze financial decision-
making in firms.
 Key Findings
Capital structure irrelevance
• One of the main findings of the Modigliani-Miller theorem is that,
under certain assumptions (such as perfect capital markets, no taxes,
and no bankruptcy costs), the value of a firm is independent of its
capital structure.

Trade-off theory
• Building on the Modigliani-Miller theorem, the trade-off theory suggests
that firms weigh the benefits of debt (such as tax shields and lower agency
costs) against the costs (such as financial distress and bankruptcy costs)
when determining their optimal capital structure.

Pecking order theory

• The pecking order theory proposes that firms have a preference for internal financing
over external financing and prefer debt over equity when external financing is
necessary.
 Analysis
• Research on the legacy of Miller and Modigliani in corporate finance has provided valuable insights into
the factors influencing capital structure decisions, dividend policy, and financial decision-making in
firms. The analysis of their work and its implications has led to a deeper understanding of how firms
finance their operations and how they allocate capital to maximize shareholder value.
• One key finding from the research is the enduring relevance of the Modigliani-Miller theorem, which
posits that, under certain assumptions, the value of a firm is independent of its capital structure.
• Additionally, research has identified alternative theories, such as the trade-off theory, pecking order
theory, and signaling theory, which provide valuable frameworks for understanding how firms make
financing and dividend decisions in imperfect markets. .
• Furthermore, research on the legacy of Miller and Modigliani has highlighted the limitations of their
original propositions and the need for further refinement and empirical testing. While their work laid the
foundation for modern corporate finance theory, subsequent research has shown that real-world markets
are characterized by imperfections and frictions that can influence corporate decision-making in ways that
deviate from the predictions of the Modigliani-Miller theorem.
 Tools Used

Google Mendeley Prisma

Scholar
 Conclusions

01 02 03

The legacy of Miller and While their original The ongoing research on
Modigliani in corporate propositions have been their legacy serves to
finance is profound, as subject to scrutiny and enrich our understanding
their work continues to refinement over the years, of corporate finance
shape the way researchers, their fundamental insights theory and practice,
practitioners, and remain central to the field providing valuable
policymakers understand of corporate finance. guidance for firms as they
and analyze financial navigate the complexities
decision-making in firms. of financing and
investment decisions in
today's dynamic business
environment.