What is Fisher's separation theorem?

By Richard Wilson AAA
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.

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