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's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  5. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  6. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  2. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  3. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  4. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  5. Term

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  6. Markets

    What Saudi-Iranian Tensions Mean for Oil Prices

    The recent break in diplomatic relations between Saudi Arabia and Iran adds complications to the already chaotic environment of Middle East geopolitics. 
  7. Economics

    New Mexico's Economy: The 6 Industries Driving GDP Growth

    Discover the four primary industries that are considered to be the most important drivers in the well-being of the economy of New Mexico.
  8. Entrepreneurship

    Economics of Owning a Bar

    Understand what costs go into starting and running a bar, as well as what earnings can be expected. Learn whether or not it is smart to own a bar.
  9. Stock Analysis

    3 Reasons Southwest Is Growing Faster than Its Competitors (LUV)

    Understand how Southwest Airlines operates and what makes it different from competitors. Learn three reasons why it's growing so much.
  10. Economics

    Explaining Income Per Capita

    Income per capita measures the amount of money that’s earned per person in a defined area.
RELATED TERMS
  1. Environmental Economics

    An area of economics that studies the economic impact of environmental ...
  2. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  3. Vertical Integration

    When a company expands its business into areas that are at different ...
  4. Political Economy

    The study and use of how economic theory and methods influences ...
  5. Elastic

    A situation in which the supply and demand for a good or service ...
  6. Economy

    Economy is the large set of inter-related economic production ...
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center