16.2 Does Dividend Policy Matter?
Our starting point in the last chapter was a proposition by Modigliani and Miller (M&M) that the capital structure choice does not influence firm value. A second proposition by these same individuals is that, without taxes and transaction costs, cash dividends and share repurchases are equivalent and the timing of the distribution is unimportant. Once we have demonstrated the conditions under which a firm’s cash dividend policy does not affect the value of the firm’s shares, we then relax these conditions to gain an understanding of why dividend policy is important to shareholders.
The Irrelevance of the Distribution Choice
In this section, we will illustrate that the distribution choice is a matter of irrelevance ...
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