The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

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The dividend irrelevance theory, proposed by Miller and Modigliani, suggests that in a perfect market without taxes or other frictions, the value of a firm is determined by its earning power and riskiness of its assets, and not by the way it chooses to distribute its earnings. However, this theory assumes that investors are rational and can buy and sell shares without transaction costs, which is not always the case in the real world. Moreover, some investors may value dividends more highly than capital gains, and so the level of dividends can affect the demand for and price of a stock.

The Dividend Irrelevance Theory, Proposed by Miller and Modigliani, Says