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 is price variance in cost accounting?

    Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ...
  2. What do you need to know to create a business model?

    Learn what a business model is, its importance and the primary elements that are needed in order to create a successful business ...
  3. Do any markets not exhibit asymmetric information?

    Find out why every market possesses information asymmetry, and why this isn't necessarily a huge or insurmountable problem ...
  4. What are the benefits of using ceteris paribus assumptions in economics?

    Find out why mainstream economists rely on ceteris paribus assumptions in their models, even though they know those models ...
RELATED TERMS
  1. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  2. Factor Market

    A marketplace for the services of a factor of production.
  3. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to ...
  4. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  5. Marginal Propensity To Consume - MPC

    A component of Keynesian theory, MPC represents the proportion ...
  6. Giffen Good

    A good for which demand increases as the price increases, and ...

You May Also Like

Related Articles
  1. Personal Finance

    Can Electric Cars Replace Gas Guzzlers?

  2. Personal Finance

    Will Tesla Cars Ever Be Affordable?

  3. Personal Finance

    Why Are Tesla Cars So Expensive?

  4. Personal Finance

    What Drives Consumer Demand for Tesla?

  5. Economics

    Utilizing Prisoner’s Dilemma In Business ...

Trading Center