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Fisher separation theorem

From Academic Kids

The Fisher separation theorem in economics asserts that the objective of a firm will be the maximization of its present value, regardless of the preferences of its owners. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". It was proposed by the economist Irving Fisher whom is its eponym.

The Fisher Separation Theorem states that:
  1. the firm's investment decision is independent of the preferences of the owner;
  2. the investment decision is independent of the financing decision.

Fisher showed the above as follows: The firm can make the investment decision — i.e. the trade off in productive opportunities — that maximizes its present value, independent of its owner's investment preferences. The firm can then ensure that the owner achieves his optimal position in terms of "market opportunities" — i.e the position he would have taken in the available productive opportunities — by funding its investment either with borrowed funds, or internally as appropriate.

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