Merton Miller and Modern Finance

Financial Management (Financial Management Association),  Winter, 2000  by Rene M. Stulz

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To avoid such disasters, he had two recommendations. First, the only way that banks could be recapitalized was with new capital. This new capital could only come from foreigners. Second, banks had to become less important as a source of financing. He thought the Asian countries had to "follow the model of the U.S. in shrinking the banking industry itself, and steadily expanding the number and variety of market alternatives to bank loans" (Miller (1998), p. 233). To make sure that his audience understood his view of banks, he emphasized that "Banking is disaster-prone, 19th century technology" (Miller (1998), p. 232). His conclusion was that "If the current crises have done nothing more than to discredit the Japanese and Korean models of bank-driven economic development, then perhaps the whole episode, painful as it has been, and still is to live through, has nevertheless been worthwhile." (Miller (1998), p. 233).

Merton Miller was always ahead of the crowd in identifying issues and in thinking about them. Nobody was better than he was in presenting ideas in such a way that they would be understood and would affect the thinking of his readers and listeners. Academic papers matter only insofar as they impact the thinking of our peers. In Merton Miller's case, he had no peers, only students, but it is safe to say that his impact on the field of finance and on the thinking of financial economists will not be matched.

I am grateful for comments from Steve Buser, Harry DeAngelo, Don Chew, Andrew Karolyi, Lemma Senbet, and Alex Triantis.

(*.) Rene M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University and an associate of the National Bureau of Economic Research.

(1.) See Fischer Black's "Foreword" to Miller (1991a).

(2.) See Miller (1991b).

(3.) Miller (1991a), p. 273.

(4.) See Miller (1986).

(5.) Jacobs (1999).

(6.) The quotes from Jacobs come from 2000 Hall of Fame Roundtable: Portfolio Insurance Revisited, Derivatives Strategy 5, August 2000, pp. 31-36.

(7.) See Miller (1991a), Chapter 3.

(8.) See Miller (1991a), Chapter 6.

(9.) The agency bond might have options attached to it that would have to be hedged, but we ignore this complication since it does not affect our conclusion.

(10.) Grossman and Miller (1988).

References

Durand, D., 1959, "The Cost of Capital, Corporation Finance, and the Theory of Investment: Comment," American Economic Review 49(4), 639-654.

Grossman, S.J., and M.H. Miller, 1988, "Liquidity and Market Structure," Journal of Finance 43(3), 617-633.

Hsieh, D.A., and M.H. Miller, 1990, "Margin Regulation and Stock Market Volatility," Journal of Finance 45(1), 3-30.

Jacobs, B., 1999, Capital Ideas and Market Realities, Blackwell, Oxford, England.

Jensen, M.C. and W.H. Meckling, 1976, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics 3(4), 305-360.

Miller, M.H., 1977, "Debt and Taxes," Journal of Finance 32(2), 261-275.