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Finance Theories Taxonomy

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Finance Theories Taxonomy

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Finance Theories Taxonomy
This document presents a taxonomy of selected finance theories developed in past 5 decades by academics, practitioners and scholars in the United States, Europe, Asia and Latin
America. A total of 14 theories and models are synthesized in this work, organized in five tables with the same structure: Theories of capital structure; capital budgeting and cost of equity; asset valuation, financial behavior and international finances.
Each table contains theories organized alphabetically with an indication of its germinal or current character. The description of the theory is accompanied by current examples of empirical research that updates or contradicts the theory and additional information about limitations, scope and opportunities of research.

Finance Theories Taxonomy

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Table 1
Finance Theories Taxonomy: Theories of capital structure
Theory

General description

Current examples of the theory

Other attributes

Modigliani and Miller

Germinal theory of corporate finance

A review of the theory by

Criticism against flaws of M& M theory

Theory of investment

proposed by Miller and Modigliani

Miller himself, offers a new

(Ball, 2001)

(1958) argues that “the value of a firm

view about the so called ‘junk

1. Market perfection. M&M assumed

is independent of its capital structure”

bonds’ which were considered

information was complete and

(Miller, 2001)

undesirable and non-tradable

symmetric, when it was not

Dividends and capital structure are

during the 60s when low-risk

2. Easy acceptance of firms with high

irrelevant in the determination of stock was the norm.

levels of debt trading off for tax-

prices in the market. (Miller and

Thirty years after the M&M

deductible benefits

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