In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, the Fisher separation theorem asserts that the primary objective of a
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
will be the maximization of its
present value
In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...
, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". It was proposed by—and is named after—the
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
Irving Fisher
Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt def ...
.
The theorem has its "clearest and most famous exposition
in the ''Theory of Interest'' (1930); particularly in the "second approximation to the theory of interest"
II:VI.
{{Ref improve section, date=January 2011
The Fisher separation theorem states that:
* the firm's Corporate_finance#The_investment_decision, investment decision is independent of the consumption preferences of the owner;
* the investment decision is independent of the financing decision.
* the value of a capital project (investment) is independent of the mix of methods – equity, debt, and/or cash – used to finance the project.
Fisher showed the above as follows:
#The firm can make the investment decision — i.e.
the choice between productive opportunities — that maximizes its
present value
In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...
, independent of its owner's investment preferences.
#The firm can ''then'' ensure that the owner achieves his optimal position in terms of "market opportunities" by funding its investment either with borrowed funds, or internally as appropriate.
See also
*
Modigliani–Miller theorem
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs ...
*''
The Theory of Investment Value
John Burr Williams (November 27, 1900 – September 15, 1989) was an American economist, recognized as an important figure in the field of fundamental analysis, and for his analysis of stock prices as reflecting their " intrinsic value".
He is ...
''
External links
Irving Fisher's Theory of Investment The History of Economic Thought,
The New School
The New School is a private research university in New York City. It was founded in 1919 as The New School for Social Research with an original mission dedicated to academic freedom and intellectual inquiry and a home for progressive thinkers. ...
Great Moments in Financial Economics: Present Value(
archived
An archive is an accumulation of historical records or materials – in any medium – or the physical facility in which they are located.
Archives contain primary source documents that have accumulated over the course of an individual or ...
), Prof.
Mark Rubinstein
Mark Edward Rubinstein (June 8, 1944 – May 9, 2019) was a leading financial economist and financial engineer. He was ''Paul Stephens Professor of Applied Investment Analysis'' at the Haas School of Business of the University of California, Be ...
,
Haas School of Business
The Walter A. Haas School of Business, also known as Berkeley Haas, is the business school of the University of California, Berkeley, a public research university in Berkeley, California. It was the first business school at a public university i ...
Model: Perfect capital market - Fisher separation theorem Dr. Henrik Mathiesen, encycogov.com
Fisher's Separation Theorem investopedia.com
Economics theorems