DIVIDEND POLICY, GROWTH, AND THE VALUATION OF SHARES

 Irrelevance dividends theory is a quite shocking theory for academics and practitioners. How not, the first time this theory appeared in 1961 in his article "DIVIDEND POLICY, GROWTH, AND THE VALUATION OF SHARES" MM stated that dividends do not have a relationship to stock prices. Before this publication of the MM article, in general view shows that dividends have a relationship to stock prices. In his article MM explains that under the capital market, dividend policy is independent, for market prices regardless of whether the company has a high or low dividend payout. Theory (Miller & Modigliani, 1961) assumes no tax, or tax on cash dividends and tax rates on capital gains are the same; that there is no transaction fee for the process of selling or buying shares therefore if investors need cash, they will sell their shares without losing commissions and not the cost of cash dividends. Investors are completely rational in their decisions; and that no agency fee implies that managers of firms that pay low cash dividends do not use corporate profits to achieve personal goals that could endanger the company (Jensen, Solberg, & Zorn, 1992).

    

For details please read Modigliani and Miller 1961