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The Modigliani–Miller theorem states that dividend policy does not influence the value of the firm. [4] The theory, more generally, is framed in the context of capital structure, and states that — in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market — the enterprise value of a firm is unaffected by how that firm is financed: i.e ...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. [1] The basic theorem states that in the absence of taxes , bankruptcy costs, agency costs , and asymmetric information , and in an efficient market , the enterprise ...
For other considerations, see dividend policy and Pecking order theory. A range of explanations is provided. [3] [2] The long term holders of these stocks are typically institutional investors. These (often) have a need for the liquidity provided by dividends; further, many, such as pension funds, are tax-exempt. (See Clientele effect.)
If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock. One common technique is to assume that the Modigliani–Miller hypothesis of dividend irrelevance is true, and therefore replace the stock's dividend D with E earnings per share ...
A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex-dividend date, though more often than not it may open higher. [ 1 ]
This approach, to some extent, arises due to the implicit contradiction of seeing value as a function of dividends, while also holding that dividend policy cannot influence value per Modigliani and Miller's "Irrelevance principle"; see Dividend policy § Relevance of dividend policy.
Merton Howard Miller (May 16, 1923 – June 3, 2000) was an American economist, and the co-author of the Modigliani–Miller theorem (1958), which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic Sciences in 1990, along with Harry Markowitz and William F. Sharpe .
If a company changes its dividend policy substantially, it is said to be subject to a clientele effect as some of its investors (its established clientele) decide to sell the security due to the change. Although commonly used in reference to dividend or coupon (interest) rates, it can also be used in the context of leverage (debt levels ...