Irrelevance principle

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The irrelevance principle in economics was espoused by Merton H. Miller. He asserted that the costs of raising capital for a corporation by selling more stock (equity), or issuing more bonds (debt), should be equal; thus a corporation's value in the stock market is independent of its capital structure, calling this the "irrelevance principle".

Miller's analogy of the principle uses a pizza: For a given sized pizza the number of pieces into which it can be cut does not change the underlying amount of pizza.

Later, Miller added refinements such as the effects of a nation's tax structures and bankruptcy policies to the relationship between a company's capital structure, dividend policies, and market value.

Miller won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1990, along with Harry Markowitz and William Sharpe, for their "work in the theory of financial economics," with Miller specifically cited for "fundamental contributions to the theory of corporate finance."

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