Dividend Policy Theories Essay Example

dividends, this type of gain cannot be realized in estate situations. To illustrate, let's consider an investor who purchased shares in a company five decades ago.

The Modigliani and Miller theory states that dividends have no influence on a company's capital structure or stock price. Rather, the return on a stock can be affected by investors regardless of the dividend offered. Furthermore, if an individual retains ownership of a stock until death and then passes it on to an heir, there are no tax liabilities associated with the appreciation of the stock.

The size of a company's dividend can be manipulated by investors to adjust their stock holdings based on whether it is too high or low. This renders the company's own dividend policy irrelevant as investors can create their own policy. According to the theory of dividend irrelevance, a company's capital structure and stock price are not affected by its dividend policy in the absence of taxes or bankruptcy expenses.

The dividend-irrelevance theory proposed by Modigliani and Miller suggests that investors are able to manipulate their return on a stock irrespective of its dividend policy, rendering the dividend insignificant. Thus, when making investment decisions, investors do not take into account a company's dividend policy as they can replicate their own.