The Ubiquitous Modigliani-Miller Model Works in Times of Very Cheap Money Like We Had from 1995 to 2008

As with most of Modem Financial Theory, the flaws in Modigliani-Miller were primarily in the assumptions. Notoriously, taxes exist. Individuals cannot borrow at the same rates as companies, and borrowing rates are not the same as lending rates. However, the greatest problems in Modigliani-Miller’s assumptions lie in ignoring transactions costs and agency issues. While brokerage costs may be low, and borrowing costs for debt relatively so, the cost of bankruptcy, both to the company itself, to the economy, and to the company's employees and customers, is gigantic — far in excess of the minor savings from over-leveraging. Hence, to the extent it works at all, Modigliani-Miller works only in times of very cheap money, when debt is particularly inexpensive and bankruptcy particularly unlikely. Of course, from 1995-2008, that is exactly what we had.³ But even then, Modigliani-Miller was completely at odds with the increasing agency disconnect between management and shareholders, which worsened considerably after 1970.
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³We are not suggesting that Modigliani-Miller is complete rubbish. Were the assumptions valid, then the results in the theorem would follow with mathematical certainty. The issue is what to make of it, and our main criticism is simply that it does not justify high leverage in the real world.

—Kevin Dowd and Martin Hutchinson, Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System (Chichester, UK: John Wiley and Sons, 2010), 67, 67n3.