Magni, Carlo Alberto (2007): Relevance or irrelevance of retention for dividend policy irrelevance. Forthcoming in: Applied Economics Research Bulletin (Peer-Reviewed Working Paper Series)
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In an interesting recent paper, DeAngelo and DeAngelo (2006) highlight that Miller and Modigliani's (1961) proof of dividend irrelevance is based on the assumption that the amount of dividends distributed to shareholders is equal or greater than the free cash flow generated by the fixed investment policy. They claim that, if retention is allowed, dividend policy is not irrelevant. This paper clarifies and reinterprets DeAngelo and DeAngelo's result: Retention itself has not to do with dividend irrelevance, which holds even in case of retention. The key assumption has to do with the NPV of the extra funds (either retained or raised): If NPV is zero, dividend irrelevance applies. Yet, the dichotomy retention/no-retention is useful, because if agency problems are present, managers tend to retain funds and invest them in negative-NPV projects, and therefore the zero-NPV assumption must be removed, so that dividend irrelevance does not apply any more.
|Item Type:||MPRA Paper|
|Institution:||Università di Modena e Reggio Emilia, Italy|
|Original Title:||Relevance or irrelevance of retention for dividend policy irrelevance|
|Keywords:||Dividend policy; irrelevance; retention; zero-NPV; epistemology; agency theory.|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G35 - Payout Policy
G - Financial Economics > G0 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
|Depositing User:||Carlo Alberto Magni|
|Date Deposited:||15. Jun 2009 05:36|
|Last Modified:||12. Feb 2013 11:37|
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Relevance or irrelevance of retention for dividend policy irrelevance. (deposited 04. Nov 2007)
Relevance or irrelevance of retention for dividend policy irrelevance. (deposited 23. Apr 2008 06:57)
- Relevance or irrelevance of retention for dividend policy irrelevance. (deposited 15. Jun 2009 05:36) [Currently Displayed]
- Relevance or irrelevance of retention for dividend policy irrelevance. (deposited 23. Apr 2008 06:57)