The two myths that broke Corporate Finance

Walk into an MBA finance classroom and you will see the altar. Two great idols dominate the syllabus: the Discounted Cash Flow and the Modigliani–Miller theorem. Together they are presented as scripture. Together they are also the twin illusions that have led corporate finance into the wilderness.

Now, let me acknowledge what the professors will rightly insist: these models are not frauds. The DCF, at its best, is a discipline. It forces the right questions: what cash will flow, when will it arrive, and how should risk adjust it? Modigliani–Miller, properly understood, is not a denial of dividends or capital structure, but a brilliant baseline: in a frictionless world, those choices do not matter, so that in our imperfect world we can see clearly what does. They are elegant scaffolding. They deserve respect.

But elegance can be a narcotic. In the seminar room, the DCF is hygiene. In the boardroom, it becomes theatre. Because the terminal value outweighs all else, the model does not test the story - it codifies it. It does not discipline optimism - it launders it. In principle, the scalpel is neutral. In practice, the surgeon is incentivised to cut in ways that flatter the forecast. And when misuse becomes systemic - when incentive structures almost guarantee distortion- then the instrument itself ceases to be innocent. It becomes the enabler.

The same with Modigliani–Miller. Its irrelevance proposition was never meant as corporate gospel. But in practice, too many managers treat it as such - forgetting that in yield-anchored sectors, dividends are not afterthoughts but the very ground floor of valuation. In Silicon Valley, perhaps, payout policy is noise. But in the mature telco or industrial, dividends are not garnish. They are the meal. Investors who have lost faith in projections collapse the horizon to what is bankable now: the payout and its cover. Everything else is vapor until it is proven in cash. The theorem is not false. The way it is lived is.

The professor’s retort is predictable: “Blame the misuse, not the model.” But when misuse is the norm rather than the exception, the line between tool and superstition blurs. When a framework is consistently used as a shield for over-promising, then its academic purity is irrelevant; its practical effect is damage.

Together, these myths have bred a corporate class fluent in a parallel language. They plan to numbers no investor believes. They chase those numbers by starving investment, which only ensures the next growth story is thinner still. They end up prisoners of their own dividend yield - lamenting “undervaluation,” when in truth the market is valuing them with ruthless clarity: paying for what is real, discounting what is dream.

This is not academic hair-splitting. It is a structural cause of corporate stagnation. Finance theory was meant to liberate managers from superstition. Instead, in practice, it has become a new superstition - numbers that look precise, theorems that look profound, while the market quietly marks everything down to reality.

If business schools wanted to prepare leaders for markets rather than seminar rooms, they would teach the tools in their true register. Teach that the DCF is hygiene, not gospel. Teach that M–M is a thought experiment, not a corporate catechism. Teach that dividends are not irrelevant, but in many sectors the only remaining proof of credibility. Teach that capital allocation is not about optimising equations, but about proving - relentlessly - that reinvestment clears the hurdle. Above all: teach that markets do not run on theory. They run on trust. Break that, and no model will save you.

Until then, MBA programs will go on minting managers fluent in elegant theory but unarmed for reality. And corporates will go on mistaking their own projections for value - while the market, with cold and unflinching honesty, refuses to believe them.