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COVER STORY
A Tribute to Merton Miller

By Eugene F. Fama, Robert R. McCormick Distinguished Service Professor of Finance
Mert arrived as a senior professor at the GSB in 1961, just about the time I was groping around for a Ph.D. thesis topic. miller and famaI had many ideas, many of them silly. He quickly and diplomatically sifted through them and advised me to pursue development and testing of efficient markets theory--the proposition that securities prices are accurate signals of fundamental value. This was a new topic generating enormous interest at Chicago and elsewhere.

In my selfish enthusiasm, I waited for Merton nearly every morning when he arrived at the door of the GSB to badger him with my previous night’s computer output. (Fortuitously, the university had recently acquired its first reasonably powerful computer, an IBM 709, which made this research possible.) Merton was always gracious, enthusiastic, and full of ideas about how the work could be improved. I now receive a lot of credit for the theory of efficient markets. In truth, though, it was a team effort. And Merton Miller (along with Harry Roberts) was a star--but unsung--player on the team.

This story exemplifies a quality that made Merton Miller perhaps the most admired star of academic finance--his willingness to contribute to the work of others with little thought of personal gain, fueled only by the enormous high he got from new ideas. I was Mert’s first Ph.D. student at Chicago, but the list of Ph.D. students that he mentored is long and illustrious and includes Michael Jensen, Richard Roll, and Myron Scholes, to name just a few. Miller also contributed tirelessly and insightfully to the work of his colleagues at Chicago for 39 years. Throughout this period, the most prominent and ambitious outsiders were always eager to present their research to the GSB’s famous Finance Workshop, in large part for the comments and insights they would get from Mert. To use a sports cliche, he had a rare knack for pushing people to a higher level.

Mert’s own research with Franco Modigliani in the late 1950s produced a blockbuster that launched modern finance. In recognition of this, Miller was awarded the Nobel Prize in 1990 for the so-called “MM theorem.” The thrust of the theorem is that the market value of a company depends on its investments in people, ideas, and physical capital goods and not on the mix of bonds, stocks, and other securities used to finance the investments. Thus, the size of the payoff pie available for distribution to security holders is fixed by the firm’s investment decisions. Financing decisions simply determine how the total pie is split among the firm’s different securities.

With 40 years of simplification by Mert and others, the theorem’s irrelevance propositions now seem straightforward--a common characteristic of great ideas. There is no longer any controversy about Miller and Modigliani’s conclusions, given their assumptions. Yet, at the time the original papers were published in 1958 and 1961, confusion about the relation between financing decisions and value was rampant, and their work generated a large but now-forgotten quantity of literature that attempted to shoot holes in their arguments.

The research by Miller, Modigliani, and a handful of others from the late 1950s to the late 1970s set the cornerstones on which modern finance is built. Harry Markowitz’s 1959 book gave the first rigorous analysis of portfolio theory and how diversification acts to reduce the risk of a portfolio. In the early 1960s, William Sharpe and John Lintner developed Markowitz’s portfolio theory into the famous CAPM, a model that specifies how the risk of a security determines its expected return for investors. For their efforts, Markowitz and Sharpe joined Miller as corecipients of the 1990 Nobel Memorial Prize in Economic Sciences. In the early 1970s, the options pricing model of Fischer Black, Robert Merton, and Myron Scholes cracked a long-standing problem and launched the now massive derivatives markets. Merton and Scholes were awarded the Nobel Prize for this work in 1998. In the mid- to late 1970s, Robert Merton, Stephen Ross, Douglas Breeden, and Robert Lucas (another Nobel laureate) developed generalizations of the Sharpe-Lintner risk-return story. Finance research in the 1980s and 1990s was largely concerned with extensions and tests of these basic models.

I spent 1975 and 1976 in Belgium, quietly doing research with few other obligations. I came back with a book and an armload of research papers. Mert quickly shot half of them down. Some of my bad ones he had done himself, but correctly. This experience taught me that nobody can do good research without selfless and insightful colleagues to keep them on a fruitful intellectual path.

Mert epitomized what makes a university, a department, or, indeed, a whole profession great--the willingness of talented people to contribute to the work of others simply because they love the game and its more exciting outcomes. In his death, the world of finance has lost one of its defining beacons. Many of us have lost a lifelong mentor, colleague, and friend. He cannot be replaced.

Related Stories:

Merton Miller: A Giant of Modern Finance
Miller’s colleagues, friends, and former students recall the man and his lifetime of achievements.

A Lifetime of Achievement
An overview of Merton Miller’s professional achievements.

Merton Miller Remembered
Miller’s colleagues, admirers, former students, and friends recall the man and his legacy.

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