Dividend Policy

Zoom Session 6
 Dividend Irrelevancy Theory
• Professors Merton Miller and Franco Modigliani (MM) advanced the
dividend irrelevance theory.

• The theory that a firm’s dividend policy has no effect on either its
value or its cost of capital.

• They proved that a firm’s value is determined only by its basic earning
power and its business risk.
 Dividend Irrelevancy Theory
MM assumed, among other things:
• no taxes are paid on dividends,
• stocks can be bought and sold with no transactions costs,
• and that everyone has the same information regarding firms’ future
earnings.

MM argued that each shareholder can construct his or her own dividend
policy.
Any Questions??