John Williams and his The Theory of Investment Value

The Theory of Investment Value was first published in 1938 by John Williams. Today, he is mainly remembered for the discounted dividend model in investment valuation. However, he was also a pioneer in the thinking on the capital structure of companies, as we can see from the following quotes in his book.

10. THE LAW OF THE CONSERVATION OF INVESTMENT VALUE

If the investment value of an enterprise as a whole is by definition the present worth of all its future distributions to security holders, whether on interest or dividend account, then this value in no wise depends on what the company’s capitalization is. Clearly if a single individual or a single institutional investor owned all the bonds, stocks, and warrants issued by a corporation, it would not matter to this investor what the company’s capitalization was. Any earnings collected as interest could not be collected as dividends. To such an individual it would be perfectly obvious that total interest- and dividend-paying power was in no wise dependent on the kind of securities issued to the company’s owner. 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 (i.e., common stock and warrants) could be combined into one, without changing the investment value of the company as a whole. Such constancy of investment value is analogous to the indestructibility of matter or energy; it leads us to speak of the Law of the Conservation of In- vestment Value, just as physicists speak of the Law of the Conservation of Matter, or the Law of the Conservation of Energy.

Since market value does not usually conform exactly to investment value, no “conservation of market value” is to be found in general. Only to a rough extent do total market values remain the same regardless of capitalization. The exceptions in practice are important enough to afford many opportunities for profit by promoters and investment bankers. (Williams, 1938, p. 73)

Williams died in 1989. In 1990, Nobel Prize in Economics was awarded to Markowitz, Sharpe and Miller.