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14th Annual Killian Award Lecture—Franco Modigliani Part 1 (1986)

Lecture about financial theory and people's spending habits

Lecture about financial theory and people's spending habits

Institute Professor Franco Modigliani "was awarded the Nobel Prize for his pioneering research in several fields of economic theory that had practical applications. One of these was his analysis of personal savings, termed the life-cycle theory. The theory posits that individuals build up a store of wealth during their younger working lives not to pass on these savings to their descendents but to consume during their own old age. The theory helped explain the varying rates of savings in societies with relatively younger or older populations and proved useful in predicting the future effects of various pension plans. Professor Modigliani also did important research with the American economist Merton H. Miller on financial markets, particularly on the respective effects that a company's financial structure (e.g., the structure and size of its debt) and its future earning potential will have on the market value of its stock. They found, in the so-called Modigliani-Miller theorem, that the market value of a company depends primarily on investors' expectations of what the company will earn in the future; the company's debt-to-equity ratio is of lesser importance. This dictum gained general acceptance by the 1970s, and the technique Modigliani invented for calculating the value of a company's expected future earnings became a basic tool in corporate decision making and finance." —Encyclopedia Britannica

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