Modigliani and Miller (MM) Hypothesis

The most comprehensive argument in support of the Irrelevance of dividends is provided MM hypothesis. Modigliani and Miller maintain that dividend policy has no effect on the price of the firm and is, therefore. of no consequence. What matters, according to them, investment policy through which the firm can increase its earnings and thereby the value firm. Given the investment decision of the firm, the dividend decision splitting the earning packages of retention and dividends is a matter of detail and does not matter. Under conditions of perfect capital markets, rational investors, absence of tax discrimination between income and capital appreciation, given the firm’s investment policy, its dividend policy no influence on the market price of shares.

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