Learn How to Make a Suggestion in English

Figure out How to Make a Suggestion in English At the point when you make a proposal, youre advancing an arrangement or a thought for someone else to consider. Individuals make proposals when theyre choosing what to do, offering counsel, or helping a guest. Figuring out how to make a recommendation is a decent method to improve your English conversational abilities. In the event that you definitely realize how to read a clock, request headings, and hold an essential discussion, youre prepared to figure out how to make a recommendation! Evaluate this pretend exercise with a companion or colleague to rehearse. What Shall We Do? In this activity, two companions are attempting to choose what to accomplish for the end of the week. By making proposals, Jean and Chris settle on a choice that theyre both content with. Check whether you can distinguish where the proposal is. Jean: Hi Chris, OK prefer to accomplish something with me this end of the week? Chris: Sure. What will we do? Jean:Â I dont know. Do you have any thoughts? Chris:Â Why dont we see a film? Jean:Â Thats sounds great to me. Which film will we see? Chris:Â Lets see Action Man 4. Jean:Â Id rather not. I dont like rough movies. What about going to Mad Doctor Brown? I hear its a significant clever film. Chris:Â OK. Gives up observe that. When is it on? Jean:Â Its on at 8 p.m. at the Rex. Will we have some food before the film? Chris:Â Sure, that sounds extraordinary. Shouldn't something be said about setting off to that new Italian eatery Michettis? Jean:Â Great thought! Lets meet there at 6. Chris:Â OK. Sick see you at Michettis at 6. Bye. Jean:Â Bye. Chris: See you later! At the point when Jean says, Id rather not. I dont like brutal movies. What about going to Mad Doctor Brown? I hear its a serious amusing film, he is making a recommendation. More Practice Once youve aced the discourse above, challenge yourself with some extra pretending works out. What recommendations would you make if a companion said to you: Why dont you/we go out to see the films tonight?You/we could visit New York while youre/were there.Lets go to the trip specialists this evening to book our ticket.What about approaching your sibling for help?How about going to Hawaii for your vacation?I propose you/we mull over all the variables before we choose. Prior to replying, consider your reaction. What will you recommend? What related data would it be advisable for you to tell your companion? Consider the essential subtleties, for example, time or area. Key Vocabulary On the off chance that youre being approached to settle on a choice, that recommendation as a rule comes as an inquiry. For instance: OK like to...?(What) will we go...? On the off chance that another person has settled on a choice and they need your feeling, it might be made as an announcement. For example:â Lets go...Why dont we go...How about going...What about going...

Vitali Bianchi. Stories and Tales Review Essay Example

Vitali Bianchi. Stories and Tales Review Paper Article on Vitali Bianchi. Stories and Tales nothing in the event that I have you poofftopayu here? Proceeding with the arrangement of beloved recollections: - ))) Be that as it may, first read a book was a splendid ditty Orlov Piggy irritated. This book-harmonica In a poodle - . New A purple beret. (Delineation: disgustingly satisfied poodle with a blockhead promoting grin) We will compose a custom article test on Vitali Bianchi. Stories and Tales Review explicitly for you for just $16.38 $13.9/page Request now We will compose a custom exposition test on Vitali Bianchi. Stories and Tales Review explicitly for you FOR ONLY $16.38 $13.9/page Recruit Writer We will compose a custom exposition test on Vitali Bianchi. Stories and Tales Review explicitly for you FOR ONLY $16.38 $13.9/page Recruit Writer In goat Red Glossy silk coat, (for example, a glad goat) In the chicken a bow. , The feline boots, The two chickens - . As indicated by the harmonica All extremely fulfilled, A pig irate (bems pig: oily, however exceptionally pleasant). The tears turned It is from the trough: She needs another Purple takes, She needs red Silk vest, She needs to bow, Boots What's more, the two cockerels howls (representation hryushkinyh dreams: full boekomp . EKT joy Piggy moving a dance and play two harmonicas without a moment's delay) Be that as it may, it has not been thought nobody She was given not, It isn't the ! what's more, the way that she didn't care for: she was given a washcloth and cleanser Goodness, my God, I understood piggy (((((. (((((((((((and still before the eyes of the last picture: pig all things considered chose to keep up position until the end and sat, got some distance from the trough. Grimy, however unbendable. It was obvious that she is pitiful, however it isn't for anything on earth won't conflict with their temperament, don't come on the throat of the melody. The main thing missing engraving PUNKS NOT DEAD This is the place the starting points of the later non-traditionalism - :. - ) By and by, grieved. Quiet down and vanish.

Forensic Botany Essay Example | Topics and Well Written Essays - 1500 words

Legal Botany - Essay Example There are issues of particularity, profile multifaceted nature, and reproducibility that lead to the dismissal of organic proof in courts. In addition, a higher number of tests, meaning the desperation for examination to yield quality and amount have regularly yielded poor DNA making investigation less compelling (Hall, Byrd, and Wiley InterScience, 2012). These variables for the most part present new difficulties in the distinguishing proof of proof in scientific organic science. Researchers have recognized the way that the majority of the proof comes in blended extents, entangling the examination procedure. Accordingly, this increases the need to create strategies that have the capability of sifting through the blended examples to introduce explicit proof. Such viable techniques will assist examiners with depending on plant proof that is liable to being disposed of in the present days. The improvement of various methods utilized in DNA profiling has served to lay an expectation for the chance of better methodologies of distinguishing proof that yield proof that is trustworthy in courts. Clearly, a compelling DNA investigation procedure for use in measurable organic science must meet certain necessities. The methodology must have the capability of building up particular contrasts between singular species regardless of a high connection. In addition, it ought to have the ability to deal with vigorous measures of tests (Bock, and Norris, 2008). An extra necessity of colossal criticality is the way that the method must show the capability of decidedly examining corrupted plant materials. In spite of the fact that researchers have gained ground in creating instruments with the ability to fulfill the above depicted prerequisites, just a couple of the created methods have the capability of meeting all the... The advancement of various procedures utilized in DNA profiling has served to lay an expectation for the chance of better ways to deal with recognizable proof that yield proof that is reliable in courts. Clearly, a powerful DNA examination strategy for use in criminological organic science must meet certain necessities. The methodology must have the capability of setting up particular contrasts between singular species independent of a high relationship. Besides, it ought to have the ability to deal with vigorous measures of tests. An extra necessity of tremendous criticality is the way that the strategy must show the capability of decidedly investigating corrupted plant materials. In spite of the fact that researchers have gained ground in creating apparatuses with the ability to fulfill the above-portrayed prerequisites, just a couple of the created procedures have the capability of meeting all the necessities. In any case, the short pair rehashes (STRs) and single nucleotide polym orphisms (SNPs). Additionally, bar coding has risen for better examination in the future.Specialists are generally sharp in ensuring that assortment of tests observes a standard strategy. The assortment is a basic advance in light of the fact that the seizure of the examples of intrigue happens now. Preceding the assortment of the expected examples, there is a requirement for a master to set out on a compelling acknowledgment technique, before assortment of the example precise acknowledgment fills in as the underlying advance in the reliance of measurable natural science in recognizing any kind of wrongdoing.

Article Critique

Question: Talk about theArticle Critique. Answer: Presentation: The article, the basic difficulties confronting New Zealands CEOs: suggestions for the board aptitudes are a fascinating perused. The paper is about the 2012 review of 265 New Zealand CEOs. The article plates the changing idea of human asset the executives rehearses in the enormous associations of New Zealand. The underlying theory of the writers in the article was that human asset pros need to concentrate on the advancement of administrators, and participate themselves being developed procedures that connect interior and outer limits. In the article, writers clarified that associations ought to build up a culture where pioneers could be created. Today, the associations don't just need the chiefs who can accomplish the value-based work yet in addition associations need the pioneers who can change the associations. In the wake of perusing the article I concur that it is conceivable and alluring to be both a pioneer and an administrator, and they ought to be one of the equivalent. Base d from past encounters supervisors directed what ought to be done, however flopped toeffectively give models or appropriately direct the staff.Many contributing elements assumed a job to the result, for instance the chiefs absence of information, capacity and authority. At the point when a trough and pioneer are one of the equivalent, thiscan augment finishing objectives and errand successfully, with negligible pressure, high profitability and positive results (Jensen Scott, 2014).An viable director that can provide guidance, give models, lead adequately if change should be actualized, and have vision. The conversation of contrasts among pioneers and administrators from the start appears to be to some degree semantic. On occasion it appears that the term director is utilized to show a lesser type of authority. Mesko Kor (2013) explains this discussion by contending that pioneers must be compelling administrators and powerful directors will be acceptable pioneers. One of the greatest quality of the article is its straightforwardness. In a straightforward yet amazing manner creators clarified the contrast among administrators and pioneers and the significance of it for CEOs of enormous firms. The primary distinction among administrators and pioneers is that chiefs have people who work for them and that pioneers have people who tail them. A flourishing business singular should be both a solid chief and director to have the option to have his group on board to tail him-her make the vision of progress. Be that as it may, as per Pluncknette (2014), the world is brimming with numerous great heads, yet there are few administrators who are pioneers. Overseeing is centered around taking care of business as effectively as could be expected under the circumstances and controlling the work that is finished. Their attention is frequently on their objectives and guiding the representatives to do what is strategy driven or hierarchically perceived. Knowing t he complexities of the association, strategies and bearing and being able to lead and persuade customers is the best of the two universes and having the attributes of a pioneer and a chiefs ought to be the objective. The essayist accepts there is almost negligible difference isolating the calling of the director and that of a pioneer. In todays economy, associations must stress on sustaining abilities, creating ability, alongside boosting productivity. In an association, chiefs and pioneers need to work to characterize reason to their representative as opposed to only an errand. I concur that that being both a pioneer and director is conceivable or attractive. Being both you must be a case of a solid and positive good example to empower, move, and inspire others to work to their maximum capacity for accomplishment of you, them, and the association. It is trying to be both yet not feasible while the both need to impact others and bolster the requirements and worries of others.The mix of good chief and great pioneer is uncommon and important, and undeniably more helpful than it is possible that only one (Andersen, 2012). Authority takes the capacity to guide and impact others. Significant qualities of a viable pioneer are sharp discernment aptitudes, responsiveness to others needs, authoritative abilities, great communicator, and the capacity to inspire your group, and be acceptable at setting goals.Authors featured that Leadership and the board have an impressive number of contrasts. Actually, it is more right than wrong to state that all heads are chiefs with a specific goal in mind, anyway not all administrators can be pioneers. It is anyway so as to comprehend that the jobs of arranging, driving, sorting out and controlling inside an association can be performed by both a pioneer and a director in equivalent measure. That being stated, there are difficulties looked by both the pioneer and the administrator with respect to the previously mentioned jobs. Seeing as how the directors job is one of controlling, they are entrusted with the consistent checking of procedures to guarantee things go as arranged (Drew, 2013). At the point when these procedures go astray, the supervi sor is by and large on the less than desirable end. In regard to the pioneer, the difficulties looked in controlling are that the individual must accommodate the individual interests of those under him/her with the authoritative objectives. Actually, I wouldagree that supervisors and pioneers aredifferent and that to be really powerful the two must be joined to define the perfect administrator/pioneer. I do accept that there are numerous successful chiefs that are bad pioneers and great pioneers that are not awesome managers.I had a supervisor who realized his activity so well that he had it down without deduction yet he never showed signs of change or adjusted he did agood enough employment and all the numbers and assignments were practiced, anyway he never observed or needed to see the master plan upper administration let this happen simply because his undertakings were cultivated. Hehad negligible relationship building abilities and no vision to perceive what his area of expertise could have been. There are additionally pioneers who don't oversee well and depend on appointing to keep things in good shape. I am not saying this is perfect yet the truth of the matter is there are pioneers out there that can't oversee ye t are acceptable pioneers and directors that work admirably overseeing yet not driving. Like I said earliera mix of the two would be best. I for one accept that self-reflection is the single most noteworthy need that we have as pioneers. Without that all else is scholarly. Except if we can step back and measure ourselves sensibly against these different speculations and discover those territories to improve then we can't develop as pioneers. Concerning driving, administrators face the test of tenderizing out the best in their representatives in term of trust among others, despite what might be expected, pioneers are confronted with the test of adjusting the requirements of the association just as the necessities of people (Sanborn, 2015). Concerning sorting out, supervisors face the test of guaranteeing smooth coordination of work processes between varying offices, where as pioneers are confronted with the difficulties of guaranteeing smoother coordination and the accomplishment of a given venture at determined time spans. Finally, concerning arranging, chiefs are confronted with the test of facing challenges planning t o accomplish a specific objective or goal. In actuality, pioneers are confronted with the errand of facing challenges in quest for long haul objectives and goals. As an end I can say that I would concur with the creators that that the world needs more supervisors who are likewise pioneers. Many individuals can play out the assignments of chief, yet to lead and persuade requires characteristics that may not be innate in everybody. With all the various models of authority and methodologies in the executives, it is critical to recall the individual and tailor ones initiative and the board style to the person.The challenges looked by both the supervisors and pioneers are somehow very comparative. It is significant anyway to comprehend that not all supervisors have the potential and capacity to become pioneers (Ou Tsui, 2014).The article, unmistakably characterizes the pioneer and chief jobs, recognizing the distinctions and the difficulties of the two jobs. I concur with the meaning of every job, and feel that somebody could serve in the two limits. I would need to state that it would become overpowering and one individual working in the two limit s would be seriously testing and could harm the group, a group needs an administrator and the chief and group need a pioneer. The two jobs require a particular range of abilities one individual attempting to adjust the two positions won't be helpful to anybody or the business. The characteristics and characteristics of tutoring and aiding showed by pioneers alongside the heading and oversight of a supervisor should merge together to make a pioneer/director with all characteristics that creates trust and regard with subordinates to make enduring connections where present moment and long haul objectives are shared by the group. References Andersen, E.(2012).Manage or Lead? Do Both.Retrieved from https://www.forbes.com/destinations/erikaandersen/2012/04/10/oversee or-lead-do-both/#76f5b69d373c Drew, S. what's more, Coulsonà ¢Ã¢â€š ¬Ã‚ Thomas, C., 2013. Change through cooperation: the way to the new organization?.Team Performance Management: An International Journal. Jensen, K., Scott, R.J., Slocombe, L., Boyd, R. what's more, Cowey, L., 2014. The administration and authoritative difficulties of progressively signed up government: New Zealands Better Public Services changes. Hutchinson, A. Boxall, P. (2014), The basic difficulties confronting New Zealands CEOs: suggestions for the board aptitudes, Asia Pacific Journal of Human Resources, vol.52, pp.23-41. Kor, Y.Y. also, Mesko, A., 2013. Dynamic administrative capacities: Configuration and organization of top officials' abilities and the association's predominant logic.Strategic Management Journal,34(2), pp.233-244. Ou, A.Y., Tsui, A.S., Kinicki, A.J., Waldman, D.A., Xiao, Z. also, Song, L.J., 2014. Humble CEOs associations with top supervisory crew mix and center directors responses.Administrative Science Quarterly, p.00018

United Nations :: Free Essays

Depict the objective and elements of the United Nations. Upon the conclus5ion of WWII, the 1945 San Francisco Conference made the arrangements for the United Nations. The reason for this worldwide association was to advance universal harmony and security, settlement of questions between countries by quiet methods, grow neighborly relations with different countries, and the worldwide collaboration to illuminate worldwide social, monetary, and social issues. To achieve this motivation, the United Nations is partitioned into six offices, all having their own particular obligations.      The U.N. sanction gave the Security Council the obligation managing dangers to our universal harmony and security. There are five lasting individuals on the board and they incorporate China, France, Great Britain, Russia, and the U.S.. Every part conveys veto control over other the member’s activities. There are additionally ten non-changeless individuals chose by the General Assembly. These ten individuals serve a two-year term to guarantee that different populaces are spoken to on a turning premise.      The General Assembly incorporates all democratic qualified countries. This gathering meets to talk about and make proposals concerning world issues. Africa makes up 33% of all out participation and can impact the goals procedure.      The Secretariat is kind of the snort or worker in the association. They are liable for the everyday tasks, assembles meetings and conferences, and circulates data to different divisions just as people in general.      The U.N. Secretary General fills in as a post. This piece of the association is to educate the Security Councils regard for immediate or potential dangers towards our reality harmony. The Secretary general likewise may embrace exceptional missions and order crisis powers.      The Economic and Social Council arranges the exercises of explicit offices. It is their dependably to is ensure every office is running smooth and the correct way.

Charismatic Leadership Guide Definition, Qualities, Pros Cons, Examples

Charismatic Leadership Guide Definition, Qualities, Pros Cons, Examples “Motivation is everything. You can do the work of two people, but you can’t be two people. Instead you have to inspire the next guy down the line and get him to inspire his people. â€" Lee IacoccaYou’ve probably met a person who oozed of charisma. The almost-indescribable characteristic is something we associate with other leaders, while we consider some people simply lacking it. More often than not, charismatic leaders are considered powerful orators with a clear vision. © Shutterstock | MooshnyBut what is charismatic leadership about? In this guide, we’ll explore the theories that gave birth to this leadership style from Weber to House. We’ll also look at the core elements of charismatic leadership theory and analyze the characteristics leaders need to possess in order to be considered charismatic. Finally, we’ll explore the advantages and disadvantages of the style before examining a few examples of the style.UNDERSTANDING THE DIFFERENT CONTEXT OF CHARISMATIC LEADERSHIPCharisma is a trait often associated with leaders and the world is full of examples of people being described as charismatic leaders. The term charismatic comes from the ancient Greek word charis, which means grace, kindness and life. Charismatic people are considered as graceful and virtuous. The idea of using one’s charisma and influence in order to lead is not a new way of looking at leadership, although the theories around it are rather recent.In this section, we’ll ex plore the idea of charismatic leadership through its past and present contexts.The historical contextThe idea of a strong and noble leader, who relies on personal characteristics, has been present in history. People have attributed and associated great personalities with the ability to rule in a good manner ever since the dawn of time.In terms of crafting a proper leadership theory, the two biggest influencing theories behind charismatic theory have been developed by Max Weber and Robert J. House.Max Weber’s charismatic leadershipThe charismatic theory’s driving force is Max Weber’s study on political obligation. The German sociologist explored the reasons people follow authority and the findings were published posthumously in 1922 in Economy and Society.Weber moved away from the classical thinking that authority is achieved through the three routes:Self-interest â€" You obey for material or economic gainFear â€" You follow the rules because you don’t want the punishmentHabi t â€" You obey simply out of the socialization of authorityInstead, Weber thought people follow a leader or a state because they evaluate the authority and perceive it good, right or just form of power. Therefore, the leader’s legitimacy is subjective to each subordinate.From the above ideas, Weber distinguished three models of legitimate leadership, summed up in the below image: Alberto Veira Ramos, SlideplayerWeber’s idea of charisma was value-free and more about the appearance of charisma rather than making specific value judgments. He writes in the book how charisma “knows no formal and regulated appointment or dismissal, no career, advancement, or salary, no supervisory or appeals body, no local or purely technical jurisdiction, and no permanent institutions in the manner of bureaucratic agencies”. Charismatic leaders are almost savior like and people follow them as they are perceived to put things right.Charismatic leadership relies on three components in Weber’s theory. There is the psychological dimension, which refers to the inner qualities of the leader. Weber talks about the trait being a “gift” of the leader, claiming it could be either a divine trait or a specific physical or mental state of being. But since charisma to Weber, is value-free and created by the subordinates’ assumptions, there is no detailed explanation on the origins of charisma.The second dimension is about the social aspect. Charismatic leadership might not stem purely out of one’s inner being, but have a social source. This could be the cultural influence of society, family, work or even education. Charisma essentially takes on a traditional form and legitimizes its source. The impersonal nature of charisma implies that it can be taught, according to Weber.Finally, Weber’s theory also has a relational dimension between the leader and the subordinate. According to Weber, charisma is the “affectual relationship between leader and followers developing as the historical product of the interaction between person and situation”. A leader has to prove his or her worth and the charisma in order to continue to enjoy legitimacy. Charismatic leadership is therefore relational because the subordinates can withdraw their support, leading the leader without legitimacy to rule.Interestingly, Weber’s charismatic leader carried its own demise and t he legitimate authority of a charismatic leader was something he didn’t think could last. This was because it changed the system it was operating in and removed the traditional justification of authority around it. According to Weber, charismatic leadership would be hard to routinize and therefore, it created succession issues in organizations or the state.Interested in learning why we as humans are prone to falling for charismatic leaders? Watch this TED talk. Robert J. House’s charismatic leadershipWeber’s ideas of charismatic leadership were theoretical and the conversation that followed around the topic tended to be speculative in nature. In 1976, Robert J. House published his working paper A 1976 theory of charismatic leadership, which aimed to move the theory to a more testable concept. House moved the charismatic leadership theory more towards a psychological explanation, rather than a sociological or political science theory of power.House’s main argument was that ch arismatic leadership is rooted in personal and behavioral characteristics and the leaders with these qualities can inspire subordinates through appropriate articulation of the organizational vision. Therefore, it follows the similar notion of Weber that charismatic leaders don’t receive authority out of fear or financial gain, but out of emotional excitement.To communicate the vision to subordinates, charismatic leaders need to showcase high levels of self-confidence, dominance, influence and strong conviction. Furthermore, certain situational and organization factors can help boost the leadership’s appearance. These assumptions and characteristics will be discussed further in the following sections.The main takeaway from House’s theory is that charismatic leadership should not be defined solely in terms of the effects it has on followers. Instead, House looked more towards the behaviors and the situational factors that influence the effectiveness of charismatic leaders.The mo dern contextThe above two theories have largely shaped the conversation around charismatic leadership, providing the theory with context and testable characteristics. The two theories, along with other research on the leadership model, have revived the trait-based approach to leadership.Since charismatic leadership is linked with personal traits and the transformation of subordinates, the current conversation around the model often links it with transformational leadership theory. Both of these theories seek radical changes around the organizational structure they operate in, yet there are certain important differences between the two.While charisma can improve the effectiveness of leadership, transformational leaders don’t necessarily have to be perceived as charismatic in order to rule efficiently. Furthermore, transformational leadership always has change at the heart of it, whereas charismatic leadership might not be interested in changing the operational structure of the orga nization.Nonetheless, in current literature, charismatic leadership has assumed a more benevolent approach to leadership. Instead of focusing on a strong moral conviction and the personality traits of the leader, the inclusion of transformational elements has added a behavior element to the theory.Aside from linking charismatic leadership with other leadership styles, such as transformational and inspirational leadership, the focus has also moved even more towards the emotional, inspirational and symbolic aspects of the leadership’s ability to influence. In 2007, J. C. Pastor, M. Mayo and B. Shamir’s research found the emotional responses of the subordinates influence the perception of the leader as charismatic. Furthermore, it isn’t purely about the leader’s apparent qualities, but the characteristics of the subordinates can influence how effective charismatic leaders are.Ronald E. Riggio, PhD and professor of leadership and organizational psychology, summed up the current idea of charismatic leadership well in his 2012 article. Riggio defined charismatic leaders as “individuals who are both verbally eloquent, but also able to communicate to followers on a deep, emotional level.” Charismatic leadership is about creating a vision and captivating people emotionally with the message.THE CORE ELEMENTS OF CHARISMATIC LEADERSHIPThe above touched on the context and approach to charismatic leadership. It’s now time to consider the core elements of the leadership model and how they drive the above ideas forward.Organizational and situational assumptionsHouse’s 1976 essay on charismatic leadership outlined key assumptions regarding the leadership model. The assumptions rely on the idea that charismatic leadership relies on the behavioral, situational and organizational factors.First, charismatic leadership requires the leader to showcase behaviors, which create an impression of competence and success. In short, the leadership requires a strong goal arti culation. D. Berlew wrote in Leadership and Organization Excitement in 1974 that, “The first requirement for…charismatic leadership is a common or shared vision for what the future could be.“ A good example of this would be Martin Luther Kings, “I have a dream”. The speech and idea provided subordinates a vision of the future, the leader would want them to accomplish together. According to House, the goal articulation is more often about ideology rather than pragmatism.For successful goal articulation to appear, a charismatic leadership theory requires the use of motive arousal. This means the goal and vision put forward by the leader must create an emotional appeal and spark off the right type of motivational response. House points out to the example of military leaders, who use authoritarian symbolism and images of the enemy in order to excite the followers. He gives the example of the US military leader, Patton, who addressed recruits “against the background of a larg e American flag, and dressed with medals of his accomplishments and wearing a shining helmet displaying the four stars indicating the status of general.”The motive arousal aspect of charismatic leadership requires an understanding and an analysis of the task and the subordinates’ need for achievement, affiliation and power. The effectiveness to accomplish tasks can therefore be manipulated by the leader’s ability to arouse the right motives. House summarized studies, which had found the following assumptions:Task requirementsThe correct motive arousalAssumption of calculated risksAchievement oriented initiativeAssumption of personal responsibilityPersistence toward challenging goalsThe need for achievementBeing persuasiveAsserting influenceExercising control over othersBeing competitive or combativeThe need for powerAffiliative behaviorCohesivenessTeam workPeer supportThe need for affiliationFinally, charismatic leadership requires specific situational determinants. For Weber, charismatic leadership is born out of a stressful situation. The vision outlined by the leader is likely something difficult or impossible to achieve, yet which creates the right motive arousal in leaders, enforcing the idea of the charismatic leader as the ‘savior’. An example could be Mahatma Ghandi in India during the Indian independence movement. In a business environment a failing company might benefit from a charismatic leader who creates a vision of a better future for subordinates.But stressful disasters are not the only situational determinant charismatic leadership can use as an advantage. Edward Shils’ 1965 paper Charisma, Order, and Status identified the formal institutions of society, with large amounts of power, being something that could be perceived charismatic. In essence, the idea of the “awe-inspiring quality of power” can integrate a vision and therefore, become seen as charismatic.Behavioral assumptionsFor the above characteristics of charismatic lead ership to work efficiently, the behavior of the leader must be aligned with the assumptions. Charismatic leadership model emphasizes the behavioral assumptions as the key.As mentioned in the previous section, House outlined the four qualities of a charismatic leader. These were:DominantStrong desire to influence others.Self-confident.Strong sense of one’s own moral values.Interestingly, charismatic leaders are not just interested or relying on showcasing the above qualities themselves, but rather they behave in a way that supports role-modeling behavior. Essentially this means charismatic leadership wants subordinates to adopt the behaviour of the leader.Role-modeling has been shown by studies to have a strong effect on influencing other people. An authoritative figure can get subjects to administer pain to other people and people can adopt biased or racist attitudes from leaders. But naturally, role-modeling could be used for positive change and behavior as well. In a corporate e nvironment, role-modeling could work as a method of improving employee motivation. According to House’s analysis, “leaders can have an effect on the values (or valences) subordinates’ attach to the outcomes of their effort as well as their expectations”.From the above idea follows another crucial behavioral aspect of the charismatic leader. The leader should focus on engaging in behaviors, which create the impression of competence and success. Weber mentioned in his book how charismatic leaders are required to prove their power to the subordinates. While accomplishments are generally the easiest way to do this, the idea of appearance will also help charismatic leaders. This appearance assumption links closely with the above idea of goal articulation.A very nice chat around how to become a better leader. The best way to create the impression is often through high expectations and strong self-confidence. Studies have shown your self-esteem level and the expectation of being ab le to achieve a goal relate to motivation and goal attainment. In charismatic leadership, the leader has a role of improving the subordinate’s self-esteem in order to improve organizational effectiveness.A leader must not only set high-expectations, but also show confidence in the subordinate’s ability to get things done. The behavioral assumption is associated with the above motive arousal. As shown earlier, specific tasks require the leader to use specific motivational influences in order to get the best out of subordinates. Furthermore, House drew two hypotheses out of the assumptions:If leaders set specific and high expectations, then the goals of subordinates are clearer.If the leader shows more confidence in the subordinate’s ability to achieve those goals, then the person will perceive them more attainable.Therefore, charismatic leadership works most efficiently when leaders are able to instill confidence and self-esteem to subordinates, which means subordinates are mor e inclined to achieve objectives and thus trust the leader further.THE QUALITIES OF CHARISMATIC LEADERSince charismatic leadership is heavily focused on the behaviour and personality of the leader, it comes as no surprise that the qualities and traits required of a charismatic leader are at the centre of the theory. We’ve already touched upon some of the traits through House’s theory (dominant, self-confident, self-assured and strong conviction), but further research has identified other characteristics as well.After examining the key traits of a charismatic leader, we’ll also consider the steps you should take if you’d like to use this leadership model.The key characteristicsIn 1988, Jay Conger and Rabindra Kanungo published Charismatic Leadership, which outlined the key characteristics of a charismatic leader. The findings have been repeatedly shown to be accurate in a number of other similar studies, such as Robert House and Jane Howell’s 1992 paper Personality and Char ismatic Leadership.One thing charismatic leadership emphasizes is the nature of your charisma. While it might seem charisma is a ‘natural’ quality you either have or don’t have, the reality is that many charismatic qualities can be learned and reinforced.#1 VisionaryMartin Luther King dreamt of a society where everyone is equal, Gandhi wanted different religions to live in peace in India and Sir Winston Churchill wanted the British to stay resilient during the war. Every charismatic leader has a vision â€" they are able to look beyond the horizon and imagine a different way of doing things. Obviously, it doesn’t mean everyone has to imagine a society-wide change or movement, but you have to have a vision of what you want to achieve or what you want the organization you lead to accomplish.Being a visionary means being open to chance and understanding that constant improvement is required for progress. You need to embark on a road of self-improvement, where you are constantly looking to expand your skills and learning things beyond your comfort zone. In addition, you need to listen to other people and understand how their experiences have shaped them. If you can combine your understanding of the world, with the experiences of others, you can visualise new solutions and approaches to solving things.Visionary people are both dreamers and doers. You want to spend enough time thinking about the world and the problems you face. But you don’t want to be caught daydreaming, while other people fix the problems.This video shows you how to develop your vision statement and inspire your subordinates. #2 ArticulateCharismatic people are good communicators. In order to get people on your side â€" to understand your vision and to believe in it â€" you have to be able to share the message loud and clear. If you aren’t articulate, your subordinates won’t be able to understand what you are envisioning.There are two key aspects of articulation in terms of charismati c leadership. First, it simply means being a better communicator and being able to talk about complex issues to people in a way they understand. In the business world, the key is to explain the why, the how, and the when. You need to explain the reason or the vision behind the action, clarify what is needed in order to get to the objective and ensure people know how fast this all should be accomplished.But the second aspect of articulation and communication relates to the understanding of your subordinates. Charismatic leadership requires you to be able to read people and select the right motivations for inspiring them. Therefore, you need to be able to analyze your audience and select the right communication style for each occasion.If you’d like to improve your own communication abilities, especially in terms of getting your message across, watch the below YouTube clip. On it, Julian Treasure explains how to speak in a way that ensures people listen. #3 SensitiveCharismatic leade rs must be sensitive, both in reading people’s emotions and ambitions, but also in showing them compassion and empathy. As mentioned above, you must be able to sense the other person’s expectations and needs in order to properly approach them with your vision. In short, you need to be able to sense the mood and be able to adjust to it.In addition, you must also show humility and compassion. When you listen to people, you need to convince them you are there to help and you understand what the person is saying. Even if you can’t do what the person might want you to do, you need to be able to convince them to work in a specific way and make them feel like its their best interest as well.The charismatic leader who can show compassion towards subordinates is the leader that gets people on his or her side. Since you require subordinates to buy into your vision, you need to show respect and empathy towards them. People follow leaders who make them feel good and important, instead of someone who doesn’t listen to them.#4 Risk-takerJust as you need to be a visionary, you must be willing to take risks as well. Because you are trying to obtain a visionary goal, something transformative and different, you won’t have a paved out road ahead of you. In order to accomplish great things, charismatic leadership requires you to put yourself on the line.Risk-taking means two things. First, as a leader, you are accountable for any problems that might arise. You aren’t afraid to step out of the way if things don’t work out and you won’t try to place the blame elsewhere.But in addition, you aren’t afraid of challenges either. You understand that each challenge will bring about positive things, whether or not you accomplish what you set out to do. You are ready to give it your best shot because you can see the rewards of accomplishing things, while realizing failure isn’t the end of the world.In business, risk-taking isn’t the same as gambling. Risk-takers don†™t just rush into things and hope for the best and neither do charismatic leaders. You understand the importance of analyzing tasks and the options ahead of you, but you are willing to take calculated risks if the situation calls for it.Listen to Stephen Kelly (CEO of Sage) on what he has to say on taking smart risks. #5 CreativeFinally, charismatic leaders tend to be creative. In order to be more visionary, you naturally need a healthy dose of creativity. You must be able to think outside of the box in order to create meaningful change in the organization.Creativity is further linked to the charismatic leadership’s idea of strong conviction. You need to be able to speak with conviction â€" meaning that you need to use creative images, rhetoric and messaging in order to get others to buy into your vision.If you’d like to improve your ability to be more creative and to stand out from the crowd, you should try these five scientifically proven tips (BBC Science):Change how you do t hings â€" Altering your daily routines can help you because more innovative.Removing distractions â€" You should try to create an environment around you which doesn’t have distractions â€" visual or audio -.Spend time on mundane tasks â€" You can spark your creative mind by engaging in tasks, which require less thinking.Improvising and taking risks â€" Risk-taking can boost creativity together with improvisation. If you can play an instrument or you like drawing, spend some time doing it without an objective in mind.Allowing your mind to wander â€" You shouldn’t be afraid to just sit around and allow your mind to think freely.How to become a charismatic leaderOne thing charismatic leadership emphasizes is the nature of your charisma. While it might seem charisma is a ‘natural’ quality you either have or don’t have, the reality is that many charismatic qualities can be learned and reinforced. Joyce Newman, president of the Newman Group, told in a Forbes interview, “We are not born charismatic â€" we cultivate it in many ways”. Furthermore, Joyce pointed out that becoming charismatic is a “trial and error process” and “once you have your charismatic status, you can lose it”.In his 1989 book The Charismatic Leader: Behind the Mystique of Exceptional Leadership, Jay Conger proposed a four-step model for charismatic leadership. The model is a good guide for anyone looking to improve his or her charismatic leader characteristics.Step 1: Regularly assessing your vision and the environment for achieving itFirst, you need to create a vision, which fits the current environment. If you are working in an organization, you want to understand where the company is heading and where it could be heading with a new vision. You must understand the different parts making the vision a reality, such as what type of employees do you need, what must the organization focus on and who might be able to help you out.Once you have formulated a vision and a framework for achieving the vision, you need to outline to others. But even after the vision is out in the open, you need to have the clarity to keep assessing your environment to ensure the vision is attainable. While you might not change the end objective, you might need to adjust the framework on how you get to the goalStep 2: Improving your ability to communicate this visionYou need to be able to articulate your vision to the subordinates and other stakeholders in a clear and concise manner. The above points on characteristics should give you tips on improving your communication skills. But there are two other strategies you need to focus on: motive arousal and persuasive language.In order for subordinates to buy into your vision, you need to find what motivates them to perform the required tasks. Notice that in an organization, different people might find different motives appealing. For example, the idea of more power might appeal to middle management who are driven and ambitious. On th e other hand, employees with less motivation and ambition might find a vision of financial gain as motivatingYour language must be persuasive. Again, understanding the person’s motivations help, but you also need to utilize role-modeling for inspiring the person to act. Setting an example can act as a powerful motivator for subordinates.Step 3: Creating a trustworthy and committed environmentCoercion is not an effective part of charismatic leadership. Instead, you should focus on building relationships that are based on trust. This can lead to the creation of a committed environment where subordinates are inspired to work hard towards the goals.You need to be able to ensure the vision you’ve set out is viable. This means you need to be accountable for the actions the organization takes, you must be willing to take risks and you need to showcase high levels of expertise. These will help you create more trust, not only in your vision, but also on yourself as a leader.Step 4: Achie ving the objectivesThe final step is about achieving the vision you have set out using the chore tactics of charismatic leadership. This includes role-modeling and empowering your subordinates with motive arousal. Charismatic leadership provides the ideas and tools to lead people, but it also understands the differences in the situations. Therefore, achieving the vision is the key, not following a rigid set of rules in order to get there.Finally, watch the below TEDx talk by John Antonakis on the topic of why charisma matters in today’s world. ADVANTAGES AND DISADVANTAGES OF CHARISMATIC LEADERSHIPCharismatic leadership is among the leadership theories that can be both a blessing and a curse to an organization. A strong vision with emotional influences can be a force for positive change, such as the example of Martin Luther King’s civil rights movement, but it can lead to darkness as well.Advantages of charismatic leadershipAs mentioned above, charismatic leadership can at its be st, be an inspirational style to lead. A successful, charismatic leader is able to create a vision, which attract subordinates to the cause. The ability to motivate and empower people through this vision can eventually lead to more success.Consider an example of a failing business. A charismatic leader can utilize the tools of charismatic leadership and create a vision of an organization that leads the industry. The message of the better future, and the confidence the leader shows towards subordinates can guarantee the employers are motivated to work together towards these goals. As the examples and research data above shows, the right type of motivation and vision can boost people’s ability to get the job done more effectively.Furthermore, the shared vision provides another big advantage of the theory: better workplace cohesion. Since everyone in the organization is aware of the same mission and objectives, everyone is essentially working to achieve the same goal. No one is gaini ng anything more, as the motivation isn’t about punishments or financial gains â€" rather; the whole company shares the same objective. Knowing that everyone is essentially looking forward to the same achievement can create a stronger sense of togetherness and unity.The visionary way to lead can lead to better results because it ignites people’s passion. It’s hard to be a charismatic leader without strong convictions and therefore, the leader is passionate about getting things done. As many entrepreneurs tend to say, “it’s the passion that gets you up every morning”. In addition to the passionate approach to doing things, charismatic leadership also encourages risk-taking and thinking outside of the box. Together, these qualities can drive change in an organization and have a meaningful impact on the operational efficiency of the company.Since the emphasis is on achieving the objectives and working towards the shared goal, charismatic leadership tends to flourish learnin g behavior. Mistakes are not used for punishment and disasters are not shrugged under the carpet. Instead, charismatic leaders and therefore the subordinates examine the mistakes and learn from them in order to move forward. For a business, learning from past mistakes is a crucial part of avoiding the issue second time around.The clarity in the objectives and vision are especially beneficial in situations where a company might be facing a crisis. As House and Weber argued in their theories, charismatic leadership works especially well in crises. If work morale is low and the company is lacking direction, a strong, charismatic leader can provide the organization a needed boost and positive vision for the future. The focus on individuals and their self-esteem will also provide an instant boost in employee morale.Overall, the above can boost employee moral and productivity. The workplace can become a more invigorating and exciting place to be, with the possibility of larger social chan ge on the horizon. The company’s profitability, productivity and longevity can therefore improve.Disadvantages of charismatic leadershipBut as we briefly mentioned at the start of the section, charismatic leadership is not always transformational in a positive manner. The vision, envisaged by the charismatic leader, is not always universally positive and in the darkest examples of the human history, it can be deadly. If you consider the essence of charismatic leadership â€" dominance, confidence, strong convictions and the ability to get followers on your side â€" then one example of charismatic leader from history could be Adolf Hitler. He was able to paint a vision of a future for people, which they took at face value.Unlike ethical leadership, charismatic leadership doesn’t make judgments on whether the vision is good or sustainable. Therefore, there isn’t much room for inner moral conflicts within the leadership theory. The problem is that a charismatic leader might be dri ven by self-interest or poor judgment, instead of showcasing values that cherish other people’s wellbeing.In a less-sinister manner, charismatic leadership can slip into arrogance or tunnel vision. The leader, along with his or her followers, can simply focus on the vision, without re-evaluating or re-examining its validity or attainability. For an organisation, this could be devastating, as resources might be better spent in a different manner.Since charismatic leadership doesn’t work without the support of subordinates, the obedience levels of subordinates can go on unchallenged. In essence, this means the leadership model’s apparent strength can simply be down to “yes-men” around the leader. Instead of questioning or challenging the leader’s ideas, subordinates merely follow the orders.Finally, charismatic leadership is based on the relationship between the leader and his or her subordinates. If, and when, the leader moves on from the organization, the company might s uffer consequently because a strong leadership base disappears with him or her. The organization either needs a new charismatic leader, who has to spend time establishing his or her relationship with the subordinates, or implement a wholly new leadership structure into the organization. As the subordinates have based their trust in the vision of the charismatic leader, there is no leadership development within the organization to guarantee the next generation of leaders are able to take over.EXAMPLES OF CHARISMATIC LEADERSAs mentioned in the previous sections, charismatic leadership has plenty of historic examples in a range of fields. There are the political examples of Martin Luther King and the other extreme example of Hitler. But you also have charismatic leaders in the field of social justice and business.The below examples will hopefully outline the characteristics of charismatic leaders and the ideas of the model in a tangible manner.Mother TheresaMother Theresa might not be a conventional example of a leader, but she perfectly fits the definition of a charismatic leader. Mother Theresa, who was born in Macedonia, became a Roman Catholic nun and started working with the poor.She left her teaching position at the St. Mary’s School for Girls in 1946 in order to start serving the poor in the slums of Calcutta. In the 1950s and 1960s, she established different facilities in the slums to help the poor survive disease and malnutrition. Later, she also opened charities elsewhere in the world â€" all helping the poor.Mother Theresa was dedicated to a single cause and she had a vision to help the lives of those that don’t have much. She inspired others to follow her example and she dedicated her life to empowering the less fortunate. In essence, she showed what good charismatic leadership could achieve.Mother Theresa once said, “I alone cannot change the world, but I can cast a stone across the waters to create many ripples.” This highlights one of the i mportant parts of charismatic leadership: having others following you. Without the followers buying into your vision, you won’t succeed as a leader.Charles MansonBut as we’ve mentioned above, charismatic leadership is not always a force for good. For all the world’s Mother Theresas, there are examples of leaders who’ve used their charisma for doing bad. Charles Manson is one such example.In 1969, the US uncovered a cult called The Family, when the police found nine bodies in Los Angeles. The cult’s leader was a charismatic Charles Mansion who had managed to captivate the attention of young girls, only to end up killing them.Interestingly, Manson’s leadership skills and charismatic nature wasn’t just natural characteristics. He did, in fact, take a course on leadership and self-improvement during his time in prison. His ability to manipulate and influence people came from a highly popular book: How to Win Friends and Influence People by Dale Carnegie. Manson used the le arned techniques of promising people things, boosting their confidence just slightly and creating a vision of the better future, where he was the only saviour. Unfortunately for the world, his vision was dark and involved taking the lives of innocent people. He took proven leadership qualities and turned them into a sinister manipulation. Yet, his example shows how charismatic leadership works when it’s efficient.To find out more about Dale Carnegie’s book and its message, check out the below Slideshare presentation, which summarizes the ideas in the book. Despite the bad press, the book is still one of the best in the field of leadership and worth reading if you’d like to improve your communication with other people.[slideshare id=632672doc=success-society-1st-presentation-1222981677263484-8w=640h=330]Jack Welch / General ElectricCharismatic leaders have also appeared in the business world. General Electric’s (GE) CEO Jack Welch is a good example of a charismatic leader. We lch had a sporting background and he used the lessons he learned as an athlete during his time in business.After graduating from college, Welch found himself working as a chemical engineer at GE in 1960. In 1981, he became the company’s youngest CEO. His approach to his position as a CEO was about creating personal and meaningful relationships. He met with the employees and the customers, talking with them to create a positive atmosphere.Nonetheless, his charismatic leadership style didn’t mean he avoided working towards the vision. He didn’t hesitate to cut costs, even if it meant laying off employees, because his ultimate vision was about creating a valuable and respectful business. He wanted to create an organization that would beat its rivals and in order to do this, he had to weed out mediocrity from his company. While this meant certain people had to go, it also improved the company’s communication, its development and ultimately its bottom line.In a telling quote, Jac k Welch once said, “The essence of competitiveness is liberated when we make people believe that what they think and do is important â€" and then get out of their way while they do it.” The idea sums nicely the essence of charismatic leadership and especially the idea of the motive arousal.Steve Jobs / AppleFinally, another example of a highly charismatic leader in the business world is the late Steve Jobs. Whilst Jobs was not universally liked as a leader, he was effective and persuasive â€" he even got the people who didn’t really like him to continue working for him.Jobs clearly highlighted strong conviction and vision. He wanted particularly designed products, often forcing the designing team to great lengths to achieve it. He kept mentioning his key objectives and ideas in almost all of his speeches and ensured everyone in the company knew what the vision was.Furthermore, Jobs didn’t just apply a single communication tactic with his subordinates. He changed his rhetoric and figurative language according to the audience. Just as a charismatic leader would in order to find the right motive for his or her followers to participate in the vision, he was able to sense what his crowd wanted and needed from him. A study into Jobs’ use of rhetoric, Loizos Heracleous and Laura Klaering from the Warwick Business School found leaders could take advantage of Jobs’ skills and “employ them to increase followers’ belief in their charisma as well as their effectiveness as a persuasive speaker”.Jobs used different images and examples as part of his discussion. For example, IBM was the evil player in the game, while Apple would come and save the day â€" you can see the charismatic vision and motive arousal working for his favour.Below is a clip of Steve Jobs’ biographer, Walter Isaacson, talking about Jobs’ leadership style: FINAL THOUGHTSCharismatic leadership is another trait-based leadership theory, which emphasizes the leader’s ability to convinc e the subordinates to work towards a specific vision. It’s often related to other leadership theories, especially since it relies on personal characteristics of the leader. But it is a powerful theory on its own and charismatic leaders can help create lasting changes in an organization.The framework for charismatic leadership focuses on conviction, communication and commitment. You need to develop a strong vision and be able to motivate other people to follow you. Your qualities as a leader and your ability to create meaningful relationships with your subordinates are the carrying forces of charismatic leadership, not any specific process or structure of the organization.Since charismatic leaders are willing to take risks and look beyond the horizon, they can have a positive impact on an organization or society. Unfortunately, the leader doesn’t necessarily need to follow a strong moral or ethical vision. History has shown us that charismatic leaders can lead subordinates astray and cause havoc while working towards their vision.Nonetheless, the leadership theory can be an effective way to motivate people and improve the way an organization operates.

The Miller And Modigliani Capital Structure Irrelevance Theorem Finance Essay - Free Essay Example

Contrary to Modigliani and Miller (1958, MM hereafter), Capital Structure is not irrelevant when we consider a firm with a dividend payout policy. This article extends the MM capital structure theorem by relaxing the full payout assumption and introducing retention policy. The theoretical contribution shows that it is possible to verify the theorem when we suppose an investor who exchanges his initial holding for another portfolio composed of consumption and investment. The empirical analysis of this new approach is based on a data set of the USA Electric Utilities and Oil companies for the period 1990-1998. The results show that the relationships between leverage and firm value are significantly affected by the firms payout ratio. 1. Introduction Miller and Modiglianis (1958) irrelevance theorem is one of the important and puzzling issues in modern corporate finance theory [1], which has challenged the traditional view[2], that an optimum leverage exists. The main source of the puzzle stems from the fact that financial research dont seem to explain the firm financing behaviour as we attempt to reconcile the MM theory with the evidence(Myers 1984, Gordon1994, Rajan and Zingales1995). The MM theorem(proposition I) has shown that under a perfect market hypothesis the market value of any firm is independent of its capital structure (Stulz2006). This fundamental proposition explicitly indicates that the aptitude of investors to engage in personal or homemade leverage is sufficient to ensure that corporate leverage in itself cannot modify the total market value of the firm [3]. In other words, the theorem provides conditions under which arbitrage by individuals keeps the value of the firm depend only on cash flow generated by the investment policy. Literature about the validity of the MM-proposition is discussed about whether investors can really accomplish the required conditions of the arbitrage method without changing the overall value of the company. In this context, many authors have shown the inadequacy of the theorem when variables that deal with the real world are introduced. Following the seminal paper of MM (1958), most theories have been put forward in corporate finance to reconcile the shortcomings of the irrelevance theorem with variables that explain the firms choice of capital structure. According to the previous debate, criticism against this theorem can be grouped in two types of arguments: on the one hand, there are papers which deal with the limitations of the arbitrage conditions; on the other hand, there are studies which analyze the effect of market imperfections on the firms choice of capital structure. Despite the importance of these interventions, we note that all of the limitati ons deal with the explicit assumptions used by MM, but none deals with the critiques of the MMs implicit assumptions. More recently, DeAngelo and DeAngelo (2006, DD hereafter) have challenged MMs irrelevance dividend policy. Dealing with this alternative of earnings as fully distributed, these authors have showed the irrelevance of the MM dividend irrelevance theorem when MMs assumptions are relaxed to allow retention. As DeAngelo and DeAngelo(2006, page 294) wrote When MMs assumptions are modified to allow retention with the NPV of Investment policy fixed, a firm can reduce its value by paying out less than the full present value of FCF, and so Payout policy matters and Investment policy is not the sole determinant of value . According to DD(2006), the MMs irrelevance theorem forces firms to choose only among dividend policies that distribute the full present value of free cash flow(FCF) to shareholders. Distributions below the totality of earnings are ruled out by the implicit hy pothesis. Dealing with this alternative of fully-distributed earnings, MM(1958) used the same hypothesis in the development of the irrelevance of capital structure.. As pointed by the authors ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦.as will become clear later, as long as management is presumed to be acting in the best interests of the stockholders, retained earnings can be regarded as equivalent to a fully subscribed, pre-emptive issue of common stock. Hence, for present purposes, the division of the stream between cash dividends and retained earnings in any period is a mere detail. MM, 1958 p266. However, MM(1958) failed to recognize that proposition I implies that firms distribute all their cash flow to shareholders without paying any attention to their retention policy. This paper constitutes a new extended proof of the MM theorem by not considering the hypothesis of earnings as fully distributed. We will show that it is possible to verify the theorem when we suppose an investor who e xchanges his initial holding for a mix of consumption and investment. The rest of the paper is organized as follows: in the next section, we demonstrate the irrelevance of the MMs capital structure irrelevance when earnings are not fully distributed. We propose the possibility of extending of the MM theorem. Furthermore, we show that the two firms are not forced to distribute their full earnings; and the irrelevance is hold in the presence of the mix of investment and consumption. Section III describes the data set, introduces the methodology, examines the hypothesis of the variables and investigates whether the empirical Modigliani-Miller capital structure irrelevance is influenced by dividend payout ratio. Section IV provides some concluding remarks. 2. How do we reconcile MMs capital structure irrelevant theorem with the firms payout choice? 2.1 The failure of the MM theorem when earnings are not fully distributed. As indicated by Rubinstein (2003), the law of the conservation of investment value of MM(1958) was anticipated by many studies (Fisher (1930), Williams[5] (1938), Durand (1952); Morton (1954) for examples) but none of these authors have used arbitrage mechanism to prove the invariance of the cost of capital under changes in leverage. The MMs theorem demonstrates that under certain hypothesis of market conditions, the value of the firm is independent of its debt-equity ratio and is given by capitalizing the expected return generated by its assets. This model can be expressed as: for any firm j in class k (1) Where V stands for the market value of the firm, S for the market value of its common shares, D for the market value of its debts, X for its expected earnings before interest on its assets, for the capitalization rate appropriate to its class. The analysis of the MMs arbitrage steps shows the implicit hypothesis of full payout ratio which plays a crucial role in the model. The MMs capital structure irrelevance theorem constrains firms to distribute all of their earnings. In particular, we note that the validity of the proof developed by MM is based on this implicit assumption. MM(1958) consider (see MM(1958) pages 269-270 ) the return of the investor Y as a fraction of the net income available (X-rD for levered firm and X for unlevered firm) for the stockholders. (2) Where: is the return of the investor before arbitrage process, L is levered firm and U is Unlevred firm and is fraction of the total outstanding shares owned by the investor. Obviously, MM(1958) confuse artificially return of the investor(dividend return) and net income which should be distributed between dividend and retention. MM(1958 page 266) assert that the division of the stream between cash dividends and retained earnings in any period is a mere detail. When we derive the MM capital structure theorem for firms that are not distributing all their earnings as dividends, it follows a non-adequacy of the arbitrage operations, a non-proof of the irrelevance model. Table I shows the two cases used by MM(1958) when we introduce a level of payout different from 100%. Therefore, when we use the same arbitrage as MM(1958), we must then admit that the two firms distribute all the available income to verify the leverage irrelevance proposition. As will be shown later, this assumption can modify the validity of the MM theorem. To justify this thesis, we suppose the same steps of the MM first proposition but with a slight difference: here we suppose that firms are not constrained to distribute all of their earnings. This means that we introduce in the arbitrage reasoning the payout ratio (PR) as a new variable. Table I below shows that MM theorem is not verified. The difference between returns (before and after arbitrage operations) is not the same as showed by MM (1958). Table I. The irrelevance of the MM capital structure irrelevance when payout ratio is different from 100% First possibility  : VL VU Second possibility  : VU VL First stage  : the initial return of the investor YL Second Stage: Arbitrage process Sold his initial worth of the firm L Borrows an additional amount dL with the same interest rate r Acquired new shares of the firm u sold his initial worth of the firm U Acquired new shares of the firm L Acquired new bonds b of the firm L Third stage: the return of the investor YU Final stage: Difference of earnings ÃÆ' ¢Ãƒâ€¹Ã¢â‚¬  Ãƒ ¢Ã¢â€š ¬Ã‚  Y= YU -YL Interpretations It is not possible to verify the MM results when we introduce the hypothesis of payout ratio different from 100%, the difference of returns will depend on the all components of the equation. When we pose PRL=PRU=1, it is easy to obtain the same difference of returns as MM(1958): or Notes: Using the MM formulation, we consider two firms L and U, for which the expected return is the same XL = XU = X. Company U is financed entirely by stock SU and company L by stock SL and debt D. The market value of each firm is then VU = SU and VL = SL + D, We denote PRL and PRU the payout ratios of the levered and unlevered firms (MM 1958 suppose PRL = PRU = 100% all expected return is distributed).sL =SL, sU =SU denote the value of shares owned respectively by an investor in the levered and unlevered firm with a fraction 2.2 The possibility of extension;The two firms are not obliged to distribute all their income: the mix of investment and consumption solution. The object of this secti on is to show that it is possible to demonstrate MMs proposition I without the hypothesis of earnings are fully distributed. In other words, we present an extension of the MM capital structure theorem for the case in which firms are allowed to have a payout policy. To prove this new proposition, we suppose the same hypothesis used by MM (1958), except that earnings are not fully distributed. Using the MM formulation, we consider two firms U, L for which the expected return is the same XL = XU = X. Company U is financed entirely by stock SU and company L by stock SL and debt D. The market value of each firm is then VU = SU and VL = SL + D. * Case 1: we suppose the value of the levered firm VL , to be greater than that of the Unlevered firm VU ( ). We denote respectively, PRL and PRU the payout ratios of the levered and unlevered firms (MM 1958 page 269) suppose PRL = PRU = 100% all expected return is distributed). First stage (initial return): consider an investor who owns sL dollars worth of the stock in the company L representing a fraction of the total outstanding shares SL, where sL= SL. His return YL can be written as: (3) The return from this portfolio, denoted by YL, will be a fraction of the income distributed for the stockholders of company L, which equals the multiplication of the payout ratio PRL by the difference between to total return X and the interest charge r DL. Where, r is the interest rate which the firm pays on its debt D. Second Stage (Arbitrage process): now suppose that an individual investor who adjusts his own personal leverage in order to increase his profits. He makes the following operations: (a ) Sold his worth sL of the company L and he divided it as follows: (i) he partially invested an amount IU = PRL.sL (which equals: IU=PRLSL) in acquiring shares (ii) he consumes the remainder CL= (1-PRL)SL. where sL= IU + CL . (b) Borrowed an additional amount . (c) Acquired an amount of the shares of the company U. He could so by using the amount IU from the sales of his initial holding and the amount d from borrowing. Third Stage (the new return): the income of the investor ((i) who holds sU dollars worth of the shares of the company U (ii) and who must pay interest of personal debt d would be: (4) Last Stage: Arbitrage profit: Comparing (4) with (3) we obtain: (5) Thus, under this approach we can distinguish two situations: First situation: If PRU= PRL = 1 then we find the same result as obtained by MM (1958 page 270). (6) Second situation: We can also verify the same result of MM(1958 page 270) without the hypothesis of PRU = PRL = 1, we can simply assume PRU = 1, while the payout ratio of the levered firm PRL is likely to vary between 0% and 100%, we get then: (7) From equation (7), we conclude that as long we must verify, so that it pays shareholders of corporation L to sell their investments, by this means decreasing SL and hence VL, and replace them wi th a mix of consumption and portfolio investment, which contains shares of the unlevered firm and personal debt, thereby growing SU and thus VU. This arbitrage process will be finished when equilibrium restores the stated equalities between the values of the two firms. * Case 2: we suppose the value of the unlevered firm VU , to be larger than that of the Levered one VL ( ). First stage: The return of the investor who holds sU dollars of shares of company U representing a fractionof the total outstanding stock SU . Where (8) The return from this portfolio denoted by YU will be a fraction of the income distributed to shareholders of the unlevered firm U. Second stage: suppose that the investor exchanges his initial holding in U by another portfolio in the levered firm L. The arbitrage process with consumption behaviour will take the following form: the investor sold his worth of company U: and divided it as follows: (i) He invested partially of the shares of the c ompany L (ii) He invested also of bonds of the company L (iii) The remainder will be consumed. From IL and IB , we can write respectively: Third stage: The return of the investor (i) who holds IL dollars worth of the shares of the company L (ii) and who holds IB dollars worth of bonds of the company L. (9) Last stage: Arbitrage profit: comparing YL (from 9) with YU (from 8) we obtain: (10) In order to get a profitable arbitrage opportunity for the investor, we must consider a positive difference of returns. Analysing equation (10), we can easily formulate two possibility of payout ratio: In the first, if we suppose a full earning model for the two firms (PRL = PRU = 1), therefore we will obtain the same results as showed by MM(1958) (page 270). According to this situation, equation (10) can be written as: (11) In the second, the MMs results can also be obtained if we just assume a full earnings for levered firm PRL= 1 while the payout ratio of the unlevered firm PRU is likely to vary between 0% and 100% implying that the firm can use a payout policy, which is not restricted to full earnings. Such a representation is written as: (12) In this context, it is also important to show that as we must obtain , hence it pays the shareholders of company U to sell their holdings and substitute them with a mix of consumption and portfolio investment, which contains shares and bonds. If, all investors in firm U will accomplish the three stages below, decrease the value of the unlevered firm U and increase the price of the levered firm L. This switching process will be over when equilibrium restores the stated equalities between the values of the two firms. From these demonstrations (case 1 and case 2) we can conclude that we are not compelled to suppose that the two firms distribute all of their returns. In other words we can make arbitrage process merely by considering that the overpriced firm (levered firm L in the first case a nd unlevered firm U in the second case) has a payout ratio PR which is not restricted to be 100% of the earnings. The table below summarizes the theoretical findings. Table II: the MMs arbitrage and the payout hypothesis Conditions Conclusions MMs arbitrage conditions without dividend payout MMs(1958) irrelevance theorem MMs arbitrage conditions with a payout ratio Failure of the MMs proof MMs arbitrage conditions with a payout ratio and consumption hypothesis Proof of the MMs irrelevance theorem(Extension) 3. The Empirical Analysis The previous part of this paper provides a new extension of the relationship between firm value and capital structure when the firm has a payout policy. In this section, we attempt some possible empirical tests. The central issue is, whether or not the leverage ratio affects firm value when earnings are not fully distributed?. Modigliani and Miller (1958) have taken two samples of 43 electric utilities during 1947-1948 and 42 oil companies during 1953. The data are provided respectively by two studies conducted by Allen (1954) and Smith (1955); and they estimated the weighted average cost of capital (wacc) according to the financial leverage of the firm. The regression form of the model was: (13) Where wacc is the weight cost of capital approximated by X /V , here X is the expected return net of taxes, V is the market value of all securities and the financial leverage of the firm measured by the ratio D/V, where D is the market value of Bonds and preferred stock. The resul ts of the tests (as shown MM(1958page 282) are favourable to Modigliani and Miller (1958)s hypothesis. The values of the correlations coefficients are small and not statistically significant. Weston (1963) criticizes Modigliani-Miller empirical result. In particular, he assumes that the lack of effect of capital structure on the overall value of the firm is due to deficiency of the approach to take account of other factors that may be influencing the firms cost of capital. Contrary to MM, the author shows in the empirical tests that leverage is correlated negatively with firm value in the presence of the hypothesis of earnings growth. 3.1 Data and Methodology In order to conduct an empirical analysis similar to MMs, we have collected data on the same sectors from the same country as done by Modigliani and Miller 1958. The data we use are annual standardized financial information of US firms observed in the period 1990-1998. Our sample is formed by two sub samples: from the Electric sector we use 256 companies, and from the oil sector we take 223 companies. These data were obtained from the Worldscope Database (SIC Code 13 and 49). Contrary to Weston(1963), we consider the hypothesis of risk-class can be verified in the oil industry and the electric sector (as supposed by MM 1958). According to MM(1958), a linear model was constructed to explain the relationship between leverage and the firm value. The variables used in our regressions are constructed (see table III) as the same way as presented by these authors. The corresponding models used by MM(1958) are: For Model 1 :see MM(1958) page284 (note 38), for model 2,see MM(1958) page28 2; For Model 3,see MM(1958) page284 (note 39); For. With regard to the basic capital structure irrelevance theorem to be estimated; we propose three regression models as follows: Model 1: (14) Model 2: (15) Model 3: (16) Where wacc is the weighted average cost of capital; Leverage 1: first measure of leverage; ML1: modified leverage 1; Value: the ratio of the firm value; , ER: earnings ratio; DR debt ratio. The purpose of model 1 is to test the effect of leverage (as measured by Debt ratio DR) on firm value, while the Model 2 and model 3 test the effect of leverage (measured by Leverage1) on the cost of capital (measured by WACC). The variable ML1(modified leverage 1) is included in model3 to test the U-shaped hypothesis that the coefficient e of this variable should be significant and positive to confirm the traditional view, and not significantly different from zero to confirm the irrelevance theorem.. Note also that according to our approach the correlation between these variables should be different from zero. To test the validity of the MMs proposition when earnings are not fully distributed, we alternatively estimate all the above regressions in the absence (model MM58 and the model MM58supp) and the presence of the payout ratio. We validate this last alternative in two steps: In the first step, we test the models for all firms (model MMExt). In the second step, we test the models for subsamples: First Quartile sample (Firms Payout ratio is less than 25%), Second Quartile sample (firms payout ratio is between 25% and 50%), Third Quartile sample (firms payout ratio is between 50% and 75%), and Fourth Quartile sample (firms payout ratio is more than 75%). The tableIII below reports the different measures of variables and their predicted effects. Table III. Measures of variables and predicted signs Variables Symbol Measure MM Hypothesis Our Hypothesis Dependants variables Weighted average cost of capital WACC X/V Firm value ratio Value V/A The explanatory variables First measure of leverage Leverage 1 D/V Zero effect Significant effect Modified Leverage 1 measure ML1 D.D/V.S Zero effect Significant effect Earnings ratio ER X/A Debt ratio DR D/A Zero effect Significant effect Payout ratio Payout Div/NI Not tested Significant effect Notes: the table reports the different measures of variables where V: firm value= market value of equity S +market value of debt D, X: Earnings before interest and Taxes (EBIT), A: is the value of the total assets, NI net income. ML1 modified leverage 1 measure = (D/V) ²/(1-D/V). We measure the value of the Debt D by the amount of total liabilities. 3.2 Descriptive statistics As indicated in Table IV, the descriptive statistics shows that the average value of cost of capital is 5.92% for electric utilities and 4.48% for oil companies[6]. On average, we have a leverage ratio of 51.79%(37.85%), this measure is 62% (50.2%) when we use total assets as deflator . The average firm has a value ratio of 1,38 for electric utilities which is much weaker than those of oil companies (1,99). For these firms, earnings ratio ranges from 0% to 2.7% for electric utilities (0% to 66% for oil companies). In terms of net income, the average value of payout is more important for electric utilities (45%) ranging from 0% to 99,9%, than those of oil companies (16%). These results show that the division of the stream between cash dividend and retained earnings in any period is not a mere detail as supposed by Modigliani and Miller (1958 page 266). None of firms in the two samples and during the whole period (1990-1998) has distributed the totality of its income. For the normal distribution of the series around the mean (see table IV), all of the distributions of the variables are not symmetric since their skewness values are different from zero. This conclusion is also verified by the values of the Kurtosis which are quite different from 3. Table IV. Descriptive Statistics of Variables (256 Electric Utilities and 223 Oil Companies) Variables Sample Mean Minimum Maximum Std. Dev Skewness Kurtosis Obs WACC Elect 0.05924 0.00000 0.29090 0.03188 0.292328 6.376099 2304 Oil 0.04481 0.00000 0.69582 0.05448 4.75993 42.0526 2007 Leverage1 Elect 0.51796 0.01573 0.99416 0.17873 -0.46925 3.36365 2304 Oil 0.37857 0.0000 0.98237 0.21714 0.20952 2.36431 2007 Value Elect 1.38155 0.09087 9.77112 0.82268 5.51989 45.7871 2304 Oil 1.99172 0.14447 138.56 5.40308 18.7716 397.615 2006 ER Elect 0.07353 0.0000 0.027612 0.04158 0.77790 7.94274 2304 Oil 0.06418 0.0000 0.664303 0.06683 2.104262 11.546 2007 DR Elect 0.62322 0.02761 0.995066 0.14891 -0.9991 4.78983 2304 Oil 0.50220 0.0000 0.9978 0.22065 -0.2593 2.4847 2006 ML1 Elect 1.34913 0.000252 169.346 6.6480 17.3645 344.950 2304 Oil 0.61298 0.0000 23.2454 1.5346 8.6309 103.96 2006 Payout Elect 0.45169 0.00000 0.99980 0.35978 -0.15569 1.40417 2304 Oil 0.16381 0.0000 0.9991 0.27721 1.50967 3.90646 2006 3.3 The effect of Leverage on the firm value (model 1) The MM(1958)s theorem is confronted with our hypothesis in order to know the crucial effect of payout ratio on the sensitivity of firm value to leverage. If our prediction is true, we should find a significant coefficient of leverage ratio, otherwise the MMs view should be confirmed. As indicated in table V, estimates result shows that coefficients of earning ratio (ER) and debt ratio (DR) are significantly different from zero, which fails to support the MMs view. Since our results, as presented below, demonstrate that the coefficient of debt ratio is significantly negative and contrary to the traditional view. We prefer to give more explanations of this relationship based on the presence of the payout policy. The latter has a negative influence on the two samples (see Model MMExt , table V) which is in the opposite direction as obtained by the cost of capital regressions (see tableVI). There are two main explanations for this result: According to Brigham and Gordon(1968), the r elationship between stock price and leverage depends on the association between R (return on assets and investment) and i ( the rate of interest which the firm pays on its debt), not on the level of Leverage L. This can be written as: (16) Where E is the book value of the common equity per share, k is the rate at which dividend is discounted. It is evident, when R is less than i, the leverage effect on stock price P will be negative. Furthermore, the negative influence of the dividend ratio on the firm value confirms the leverage impact when the return on investment is less than the cost of debt. This means that firms experiencing lower rate of investment tend to use funds from internal and external resources to display higher payout ratio. The leverage measure is not the same: in Wacc regression, this variable is measured by debt on firm value (D/V), while in firm value regression (Value), the debt ratio is measured by debt on total Assets (D/A). The fact that both variabl es are divided by different deflators may be affected by a random disturbances of the market value of the firm. This bias correlation is not observed in the firm value regression. According to Modigliani and Miller (1958), the constant term in the previous regression should give more information on the value of the unlevered firm. As shown in table IV below, the estimated coefficient of this variable is not only significantly different from zero, but is quite positive and greatly relative to the coefficient of the debt ratio. This conclusion is confirmed for the two samples with large values for the oil companies. Table IV. Directs Pooled Least-Squares Estimates of the effects of leverage on the firm value Coefficients of Regressions Sample Constant ER DR Payout AdR ² Obs MM 58 Elect 1.893a -0.158a -0.805a 0.025 2304 Oil 2.464a -6.730a -0.668 0.048 2007 MM Ext Elect 1.963a -0.131a -0.466a -0.625a 0.095 2304 Oil 2.465a -6.703a -0.642 -0.086 0.048 2007 First Quartile Elect 1.969a -0.133b -0.412c 0.005 801 Oil 2.342a -7.490a -0.286 0.052 1440 Second Quartile Elect 1.465a 2.650a -0.554a 0.187 216 Oil 1.659a -0.197 -0.501a 0.033 279 Third Quartile Elect 1.206a 1.823a -0.249a 0.096 738 Oil 1.224a 3.229a -0.055 0.113 207 Fourth Quartile Elect 1.080a 1.809a -0.105 0.102 549 Oil 7.197a 0.983 -9.064a 0.676 72 Notes: a, b and c indicate significance at the 1%, 5%, and 10% levels respectively. 3.4 The effect of leverage on the cost of capital (model 2 and Model 3) According to Modigliani and Millers proposition I: the average cost of capital Wacc (Xt/V) should tend to have the same value independently of the degree of leverage MM (1958, page281). In other words, the leverages coefficient parameter in the Wacc regression should be insignificant and statistically equal to zero. The results of the MM model tests are shown in table V (models: MM58 and MM58supp). According to this table, the MM hypothesis is only verified in the oil sample, while leverage in the electric utilities has a negative and significant effect (coefficient is equal -0, 1162) on the cost of capital. In accordance with MM model, the fact of adding another measure in the WACC regression (ML1 in MM58supp)) is clearly favourable to MM hypothesis. The coefficients of leverage 1 in the two samples are close to zero and not significant(-0.056 for electric sample and 0.021 for oil firms). While, the modified leverage ML1 is significant and negatively correlated with the cost of ca pital (respectively -0.013 and -0.009 for electric and oil firms). This result is the same as obtained by Modigliani and Miller (1958 page 284 note 39) where they interpret it as the reverse of the traditional view. When we introduce the hypothesis of payout as not fully distributed in the previous analysis, the correlation between leverage 1 and the cost of capital is significantly negative and quite different from zero (The results of these tests are shown in table V, see Model MMExt,). This result is consistent with our hypothesis (we expect a significant influence of leverage on the cost of capital) and contradicts the validity of the irrelevance theorem. Furthermore, this result is confirmed in six out of eight tests conducted on the sub-samples: First Quartile, Second Quartile, Third Quartile and FourthQuartile. Unlike Modigliani and Miller (1958), dividend policy is an important factor that explains the relationship between leverage and the firms cost of capital. The es timations provide evidence for a decreasing cost of capital as the leverage ratio increases. It is significant to note also that according to Modigliani and Miller (1958), the constant terms of the regressions equations are measures of the cost of capital of Unlevered firms in the same risk-class. The estimates for the electric utilities and oil companies show that these costs are close to an accepted critical rate. Additional tests were also conducted to assess the relevance of the variable ML1, which is supposed to take into account the curvilinear effect of the leverage on the cost of capital. Our results suggest (table V) that the U-shaped relationship between these variables is not observed and the data provide no evidence of the traditional view. Although the variable ML1 has the same sign as indicated by MM(1958 page 284), the tests show that for both industries the coefficients are significantly different from zero. Table V. Directs Pooled Least-Squares Estimates of the effects of leverage on the cost of capital Regressions Sample constant Leverage1 ML1 Payout Adj.R ² Obs MM 58(model1) Elect 0.117a -0.116a 0.006 2304 Oil 0.020a -0.018 0.0003 2007 MM 58 Supp(model 2) Elect 0.098a -0.056 -0.013b 0.007 2304 Oil 0.011 0.021 -0.009a 0.007 2007 MM Ext (model 1with dividend payout ratio) Elect 0.111a -0.156a 0.059a 0.012 2304 Oil 0.014a -0.050a 0.107a 0.042 2007 First Quartile Elect 0.142a -0.236a 0.014 801 Oil 0.019a -0.064a 0.008 1440 Second Quartile Elect 0.053a 0.006 0.001 216 Oil 0.003 0.110a 0.033 279 Third Quartile Elect 0.083a -0.026a 0.012 738 Oil 0.045a 0.018 0.002 207 Fourth Quartile Elect 0.093a -0.038a 0.031 549 Oil 0.136a -0.196b 0.052 72 Note: a, b, and c indicate significance at the 1%, 5%, and 10% levels respectively. According to our results (see table v), when dividend payout ratio is different from 100% , the cost of capital (wacc)should vary significantly with the ratio of financial structure as measured by D/V. This relationship tends to be linear and with negative (or positive) slope. As shown in figure1 below the effect of D/V on wacc could take the forms indicated by the different straight lines. The downward sloping part of the curve depends on the level of payout ratio and the firms risk [7]. The analysis of the evolution of the debt ratio coefficient for each level of payout shows that the company should not remain indifferent to the choice of financial structure. Based on the firms payout policy, it is possible to minimize the cost of capital through a judicious adjustment of capital structure. The results of the estimations of these variables show that the company can borrow (bot h sectors) when the payout is low (PYR 0.25) or High (PYR 0.75), while a moderate policy of dividend (0.5 PYR 0.75) leads us to analyze the risk of the firm. In fact, when firms risk is low (like electric utilities), financing projects with debt is advantageous for shareholder wealth. However, if the level of risk is higher (like oil companies), borrowing is not beneficial and the firm should seek another cheaper financial instrument than debt. In addition to the previous theoretical and empirical results, it is possible to summarize our findings as follows (see table VI). The Table below also compares our approach (partial payout model ) with the MMs capital structure irrelevance model (full payout model). Table VI. Capital structure irrelevance theorem: full versus partial payout Models Irrelevance Model MM(1958)  : (full payout model) Our Extension of MMs Model: (Partial payout model) Main conclusion Capital structure is irrelevant only with a full payout ratio condition. Pay-out ratio plays a crucial effect in explaining the relationship between capital structure and firm value. Key Assumption for capital structure Analysis Arbitrage model with perfect market conditions. Arbitrage model with perfect market conditions. Implied restrictions Firm is restricted to choose among payout policies that which distributes all feasible earning. Firm is not compelled to distribute all earnings as dividends. Characteristics of capital structure Analysis Investment in shares and Bonds. Borrowing Investment in shares and Bonds. Borrowing Consumption Empirical tests and results Correlation between firm value and leverage is not significantly different from zero Correlation coefficient between firm value and leverage is statistically significant 4. Concluding Remarks The MM theorem addresses the following question: what is the link between a firms financial decisions and its total stock market value?. According to Bailey (2010), the answer to this matter lies at the heart of corporate finance and it may be paradoxical that the MM theorems provide circumstances under which financial decisions are irrelevant in determining its value. This paper has provided theoretical and empirical evidence of the importance of payout policy in explaining the relationship between leverage and the firm value. MMs capital structure irrelevance theorem implicitly and artificially uses the assumption 100% FCF payout, thereby forcing firms to consider only among payout ratios which distribute all the income available for the stockholders in every period. This constraint means that shareholders are indifferent towards dividends and retained earnings and leads to the absurd conclusion that common stock must always sell at book value[8]. The theoretical part of the p aper constitutes a new extended proof of the MM theorem by relaxing the hypothesis of earnings as fully distributed. We have shown that it is possible to verify the theorem when we suppose an investor who exchanges his initial holding by a mix of consumption and investment in another portfolio. The proof shows that we are not compelled to suppose that the two firms distribute all of their returns. As a consequence, we can make an arbitrage process merely by considering that unlevered (or levered) firm has such payout ratio. In the empirical analysis, the paper tested the MM theorem after allowing earnings as not fully distributed. Estimates results show a correlation coefficient between firm value and leverage statistically significant, different from zero and fails to support the MMs view. The downward sloping part of the linear relationship between the cost of capital and leverage depends on the level of the payout ratio adopted by the firm. The limitations of this study should again be emphasised. In the empirical analysis, we did not rely on variables related to market imperfections[9] to test the robustness of our results, but simply proposed a model to test the validity of the MMs view and to show the importance of the payout policy in resolving the capital structure Puzzle. Still, we believe that our approach may give some useful ideas for further research. As MM(1958) conclude having served their purpose they can now be relaxed in the direction of greater realism and relevance, a task in which we hope others interested in this area will wish to share. Notes As Modigliani (1989) notes  «Ãƒâ€šÃ‚  The MM paper is unquestionably the most popular of my writings, primarily because it has been, and continues to be, required reading for many graduate business schools.  Ãƒâ€šÃ‚ » F Modigliani (1989) p149-158 For a detailed comparison between MM theorem and the traditional approach, see Weston (1963) p105-107. Except for the tax-effect factor(MM1963, Graham 2010) Brealy and Myers, 2003; Copeland and Weston, 1992; Ross, Westerfield and Jaffee 2005, among others In his book the theory of investment value (1938), Williams writes, Furthermore no change in the investment value of the enterprise as a whole would result from a change in its capitalization. Bonds could be retired with stock issues, or two classes of junior securities could be combined into one without changing the investment value of the company as a whole. pp 72-73, cited by Rubinstein (2003). The extreme values (very low or very high) obtained from descri ptive statistics are due to the proxy used in the study. According to MM (1958), we have measured the cost of capital by dividing earnings on the firm value. According to Weston(1963), due to the uncertainty in their activity, the difference between Electrical Utility industry and firms in the oil industry is the class risk. For the former risk is low while for the latter risk is high and heterogeneous. DeAngelo and DeAngelo (2006) argue that MMs point of view on the irrelevance dividend policy is not true because their model constraints the firm to distribute 100% of its FCF in every period. Distributions below the totality of the earnings are ruled out by the implicit hypothesis Especially, income taxes, bankruptcy costs, agency costs, and asymmetric information.