Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy.

Question

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Modigliani and Miller's clientele effect theory suggests that investors have different preferences when it comes to receiving income through dividends or capital appreciation. Shareholders who desire income will invest in companies that pay higher dividends, while those who prioritize growth will lean towards companies who reinvest earnings. Therefore, the dividend policy of a firm will attract particular types of investors, but it should not affect the overall value of the stock as the firm still retains the same earnings and growth potential.

Due to Clientele Effect, Modigliani and Miller Argue That the Shareholders