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Under Mm Theorem, Is The Role Of Bank Will Extinct?

2186 words - 9 pages

If the Market is Perfect, Would the Banks be Extinct?CURTIN UNIVERSITY OF TECHNOLOGYBENTLEY CAMPUSINTRODUCTIONIn recent years, many of the observers believe that the financial market will be perfect due to the new and creative proposition to a variation of financial instrument and the elimination of government intervention. According to the Modigliani and Miller theory (MM theorem), in the assumption where market is perfect, the financial institutions have no major functions. (Mehta and Fung 2004, 15)The perfect market is a market where the securities market participant can:No one is a price maker, everyone is a price takerAll market participants can issue securities under the same termsFrictionless market (There are no taxes or transaction cost, information costs, and no insolvency costsAbsence of scale and scope economiesAll financial titles are homogeneous, divisible and tradableAll market parties can receive information easily for the future value of traded financial instrument(Scholtens and Wensveen 2003, 9)Under the MM theory, there is no relationship between the firm value and the way the firm is being financed. It means that, in the situation where the market is perfect, the firm can finance their capital in any ways they want, for example by selling debts or issuing stock. As a result, the role of bank which is to help the firm in financing activities will become superfluous. (Mehta and Fung 2004, 15)Therefore, this report will examine the effect of the perfect market to the role of financial institutions from different view of author. However, before the effect will be discussed, it is important to analyze the possibility to create the perfect market in the real world. It is possible to create perfect market?This report contains 4 sections. The first section is the introduction which talks about the problem that is going to be discussed. Moreover, it is going to talk about the theory and why this issue is important to be discussed. The second section is the theory and literature where several theory and different perception will be examined. The discussion will be the third section and it will compare and contrast all the theory and perception mentioned. The last section is the conclusion where the most important argument will be summarized and the problem will be answered.THEORY AND LITERATUREThese are the following theories and perspective from different author related to this problemIt is possible to create a perfect market?Perfect market can only be valid in the economic theory. They are not valid in the real world that we live in. There is no way that a market can become perfect, it is just an imagination of economist to make an assumption to support their theory, MM theory is one of them. By assuming the market is perfect, the market situation will become clear and simple. As a result, it allows theoretical economists to conceive complex mathematical models. However, it is not possible to apply this concept in public policy in the...

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