Fisher Separation Theorem
The Fisher separations theorem was proposed by Irving Fisher. Fisher is best known for his theories which describes that prices could be affected by the amount of money in circulation in an economy rather than merely by inherent demand for and supply of the relevant good or service. The Fisher separations theorem asserts that the objective of a firm is to maximize its present value, regardless of the preference of the firm’s owners. Hence under the Fisher separations theorem the productive opportunities of the firm are different from the market opportunities of the enterprisers.
The fisher’s separation theorem is broken down into three assertions. The first assertion is that a firm makes its investments rationally i.e. a firm's investment decisions are separate from the preferences of the firm's owners. Secondly the firm’s decisions are separate from those of the fir’s financing decisions. And thirdly, the value of a firm's investments is separate from the mix of methods i.e. the use of debt, equity or cash used to finance the investments.
The separation theorem is not designed to be a sensible basis from which individual firms can make decisions. Instead the theorem is used for calculations and theories which apply to an entire market. This requires the economists to make assumptions about how individual businesses will reach decisions. The theorem gets its name because it aims to separate individual characteristics from the overall behavior of a market.
Under the Fisher separations theorem attitudes of a firm's owners are not taken into consideration during the process of selecting investments, and the goal of maximizing the firm's value is the primary consideration for making investment decisions. Therefore the theorem concludes that a firm's value is not determined by the way it is financed or the dividends paid to the firm's owners.
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