As the dividend policy is the trade off between

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Unformatted text preview: nted cash or wish to change their capital structure by replacing equity with debt. 8.11.4 Does the firm's dividend policy affect firm value? The objective of the firm is to maximize shareholder value. A central question regarding the firm's dividend policy is therefore whether the dividend policy changes firm value? As the dividend policy is the trade-off between retained earnings and paying out cash, there exist three opposing views on its effect on firm value: 1. Dividend policy is irrelevant in a competitive market 2. High dividends increase value 3. Low dividends increase value The first view is represented by the Miller and Modigliani dividend-irrelevance proposition. Miller and Modigliani Dividend-Irrelevance Proposition In a perfect capital market the dividend policy is irrelevant. Assumptions - No market imperfections o No taxes o No transaction costs The essence of the Miller and Modigliani (MM) argument is that investor do not need dividends to covert their shares into cash. Thus, as the effect of the dividend payment can...
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