A:

Fisher's separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless of the preferences of the firm's owners. The theorem is named after American economist Irving Fisher, who first proposed this idea.

The theorem can be broken down into three key assertions. First, a firm's investment decisions are separate from the preferences of the firm's owners. Second, a firm's investment decisions are separate from a firm's financing decisions. And, third, the value of a firm's investments is separate from the mix of methods used to finance the investments.

Thus, the attitudes of a firm's owners are not taken into consideration during the process of selecting investments, and the goal of maximizing the firm's value is the primary consideration for making investment decisions. Fisher's separation theorem concludes that a firm's value is not determined by the way it is financed or the dividends paid to the firm's owners.

For related articles, check out Ten Books Every Investor Should Read and Profiting From Panic Selling.

This question was answered by Richard C. Wilson.

RELATED FAQS
  1. What are the main principles of the Heckscher-Ohlin Model?

    Learn about the four main principles of the Heckscher-Olin model, and find out how the model describes patterns of commerce ... Read Answer >>
  2. What does the Fisher Effect say about nominal interest rates?

    Read about what economists call the Fisher effect, which states that real interest rates are equal to nominal rates minus ... Read Answer >>
  3. How is the Macaulay duration related to fixed income markets?

    Determine how monetary policy influences the Fisher effect. The Fisher effect is used to determine real interest rates which ... Read Answer >>
  4. What percentage of asset management firms are privately held and not publicly traded?

    Explore asset management firms, a major part of the financial services sector, and learn about the respective markets served ... Read Answer >>
Related Articles
  1. Investing

    Understanding the Modigliani-Miller Theorem

    The Modigliani-Miller (M&M) theorem is used in financial and economic studies to analyze the value of a firm, such as a business or a corporation.
  2. Small Business

    Ken Fisher's Success Story: Net Worth, Education & Top Quotes

    Learn about the rise of Kenneth Fisher, the would-be forester who became the founder of one of the largest money management firms in the country.
  3. Financial Advisor

    Fisher Investments: Investment Manager Highlight

    Take a close look at Fisher Investments, a giant among money management firms.
  4. Investing

    Explaining the Central Limit Theorem

    Central limit theorem is a fundamental concept in probability theory.
  5. Managing Wealth

    Ken Fisher's Q1 Investment Moves: AAPL,EBAY,CSCO

    Ken Fisher made some interesting changes in AAPL, EBAY, and CSCO to his portfolio in the first quarter.
  6. Investing

    Ken Fisher’s Recent Portfolio Changes (AMZN, WMT)

    Fisher reduced his holdings in Amazon.com, Inc. and increased his stake in Wal-Mart Stores Inc. Fisher Asset Management’s portfolio is now valued at $53.9 billion. Here’s a closer look at these ...
  7. Investing

    Growth Investing: Famous Growth Investors (PRGFX)

    Find out who were the most famous growth investors of their time, and learn about the investment strategies that made them successful.
  8. Small Business

    What is a Firm?

    A firm is a business or organization that sells goods or services on a for-profit basis.
  9. Investing

    The Top 5 Positions in Ken Fisher's Portfolio (AMZN, LQD)

    Pay attention to whether Amazon.com, Inc. remains the top holding of Fisher Asset Management despite a 27% share price drop during the first five weeks of 2016.
  10. Investing

    Explaining the Coase Theorem

    The Coase theorem states when there are competitive markets and no transaction costs, bargaining will lead to a mutually beneficial outcome.
RELATED TERMS
  1. Fisher's Separation Theorem

    A theory stating that: 1. A firm's choice of investments are ...
  2. Bayes' Theorem

    A formula for determining conditional probability named after ...
  3. Irrelevance Proposition Theorem

    A theory of corporate capital structure that posits that financial ...
  4. Coase Theorem

    A legal and economic theory that affirms that where there are ...
  5. Modigliani-Miller Theorem - M&M

    A financial theory stating that the market value of a firm is ...
  6. Mutual Fund Theorem

    An investing theory, postulated by Nobel laureate James Tobin, ...
Hot Definitions
  1. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  2. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  3. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  4. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  5. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  6. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
Trading Center