Fisher Separation Theorem

In economics, the Fisher separation theorem asserts that the objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". It was proposed by — and is named after — the economist Irving Fisher.

The theorem has its "clearest and most famous exposition" in the Theory of Interest (1930); particularly in the "second approximation to the theory of interest" (II:VI).

The Fisher separation theorem states that:

  • the firm's investment decision is independent of the preferences of the owner;
  • the investment decision is independent of the financing decision.
  • the value of a capital project (investment) is independent of the mix of methods – equity, debt, and/or cash – used to finance the project.

Fisher showed the above as follows:

  1. The firm can make the investment decision — i.e. the choice between productive opportunities — that maximizes its present value, independent of its owner's investment preferences.
  2. The firm can then ensure that the owner achieves his optimal position in terms of "market opportunities" by funding its investment either with borrowed funds, or internally as appropriate.

Famous quotes containing the words fisher, separation and/or theorem:

    “Salad is roughage and a French idea.”
    —U.S. grandmother. As quoted in “Once a Tramp, Always ...,” by M.F.K. Fisher (1969)

    “The scholar was not raised by the sacred thoughts amongst which he dwelt, but used them to selfish ends. He was a profane person, and became a showman, turning his gifts to marketable use, and not to his own sustenance and growth. It was found that the intellect could be independently developed, that is, in separation from the man, as any single organ can be invigorated, and the result was monstrous.”
    —Ralph Waldo Emerson (1803–1882)

    “To insure the adoration of a theorem for any length of time, faith is not enough, a police force is needed as well.”
    —Albert Camus (1913–1960)