In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...
, 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 ...
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 in ...
, 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 science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
Irving Fisher.
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 in ...
, 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 ...
*''
The Theory of Investment Value''
External links
Irving Fisher's Theory of Investment The History of Economic Thought,
The New SchoolGreat Moments in Financial Economics: Present Value(
archived), Prof.
Mark Rubinstein,
Haas School of BusinessModel: Perfect capital market - Fisher separation theorem Dr. Henrik Mathiesen, encycogov.com
Fisher's Separation Theorem investopedia.com
Economics theorems