Dividend irrelevance theory
The Modigliani–Miller dividend proposition holds that, in an idealised setting with fixed investment decisions, no taxes or transaction costs and other strong assumptions, investors can create their preferred cash pattern by selling shares or reinvesting dividends. Changing the distribution policy alone therefore does not change total value in that model. Real taxes, issue costs, information asymmetry, cash constraints and legal rules can make the assumptions fail. The theory is an analytical benchmark, not proof that dividends never matter in practice.
Worked example
In a simplified perfect market, an investor wanting $100 of cash can receive a dividend or sell $100 of shares if the company retains the same funds. The result assumes no dealing costs or tax and that the investment policy remains unchanged.
Common mistake
Claiming the proposition applies regardless of taxes and transaction costs, or changing the investment programme while attributing the resulting value change solely to dividend policy.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |