Miller's Irrelevance Mechanism: A Note.

This article attempts to clarify economist Merton H. Miller's capital structure irrelevance mechanism using a geometric presentation. Such an exercise is useful because Miller's proposition is founded on analytically complex equilibrium arguments that tend to mask the intuition and logic behind his result. Miller argued that the following three results would hold in a world with personal and corporate taxes but no bankruptcy costs: capital structure is irrelevant for the firm; there is a unique debt-equity ratio for the aggregate corporate sector; and investors partition themselves into clienteles based on the unique relationship between the individual's marginal personal tax rate and his or her holdings of corporate securities.