Franco Modigliani

Franco Modigliani was born in Rome and fled to the United States during World War II. He studied law in Italy before shifting to economics and received his doctorate from New School for Social Research. He taught at Carnegie Mellon and Northwestern before joining MIT, where he spent most of his career. His most celebrated contribution is the Modigliani-Miller theorem — developed jointly with Merton Miller and published in 1958 and 1963. The theorem states that, in the absence of taxes, bankruptcy costs, and market imperfections, the value of a firm is unaffected by how it is financed — whether through equity or debt. While this proposition is mathematically true only under idealized assumptions that do not hold in practice, the Modigliani-Miller framework is fundamental because it identifies precisely which real-world frictions (taxes, financial distress costs, information asymmetry) do matter for capital structure decisions. It became the foundation for all subsequent corporate finance theory. Modigliani also developed the life-cycle hypothesis of saving — arguing that individuals save during working years to fund consumption in retirement, with implications for macroeconomic models of household behaviour and pension policy. He received the Nobel Prize in Economics in 1985. Modigliani passed away in 2003. His theorem continues to be taught in every corporate finance course globally as the starting point for understanding how firms should think about their capital structures.