, the Fisher separation theorem
asserts that the objective of a firm
will be the maximization of its present value
, regardless of the preferences of its owners. 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 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:
- 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.
- 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.