Fisher separation theorem
Encyclopedia
In economics
, the Fisher separation theorem asserts that the objective of a corporation
will be the maximization of its present value
, 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
Irving Fisher
.
The theorem has its "clearest and most famous exposition" http://cepa.newschool.edu/het/essays/capital/fisherinvest.htm in the Theory of Interest (1930); particularly in the "second approximation to the theory of interest" (II:VI).
Fisher showed the above as follows:
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the Fisher separation theorem asserts that the objective of a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
will be the maximization of its present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
, 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
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
Irving Fisher
Irving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...
.
The theorem has its "clearest and most famous exposition" http://cepa.newschool.edu/het/essays/capital/fisherinvest.htm in the Theory of Interest (1930); particularly in the "second approximation to the theory of interest" (II:VI).
The Fisher separation theorem states that:
- the firm's investment decision is independent of the 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 valuePresent valuePresent value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
, 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.
External links
- Irving Fisher's Theory of Investment, The History of Economic Thought, The New SchoolThe New SchoolThe New School is a university in New York City, located mostly in Greenwich Village. From its founding in 1919 by progressive New York academics, and for most of its history, the university was known as the New School for Social Research. Between 1997 and 2005 it was known as New School University...
- Great Moments in Financial Economics: Present Value (archivedInternet ArchiveThe Internet Archive is a non-profit digital library with the stated mission of "universal access to all knowledge". It offers permanent storage and access to collections of digitized materials, including websites, music, moving images, and nearly 3 million public domain books. The Internet Archive...
), Prof. Mark RubinsteinMark RubinsteinMark Edward Rubinstein is a leading financial economist and financial engineer. He is currently Professor of Finance at the Haas School of Business of the University of California, Berkeley, where he is involved in teaching courses in the , an academic program that is focused on equipping...
, Haas School of BusinessHaas School of BusinessThe Walter A. Haas School of Business, also known as the Haas School of Business or simply Haas, is one of 14 schools and colleges at the University of California, Berkeley.... - Model: Perfect capital market - Fisher separation theorem, Dr. Henrik Mathiesen, encycogov.com
- Fisher's Separation Theorem, investopedia.com