Fisher's Separation Theorem

Fisher's Separation Theorem states that a firm's investment decisions are determined primarily by the goal of maximizing its value, based on its available investment opportunities and the firm's risk preferences. Personal or owner preferences do not influence which projects the firm should undertake; instead, the firm's optimal investments depend on the market conditions and the cost of capital. This means managers should focus on accepting projects with the highest returns relative to risk and financing them in a way that maximizes the firm's value, regardless of the owners' individual consumption preferences, provided markets are efficient and investors can finance their own choices separately.