Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to
A) the relevance of dividends.
B) the clientele effect.
C) the informational content.
D) the optimal capital structure.

Question

Quizplus · Accepted Answer

Modigliani and Miller's dividend irrelevance theory suggests that the value of the firm is not affected by its dividend policy because investors can create their desired income stream through their own dividend reinvestment or selling shares, regardless of the firm's dividend policy. This is known as the clientele effect, where investors self-select to invest in firms based on their desired dividend policy. Therefore, the value of the firm is not affected by its dividend policy, according to Modigliani and Miller.

Modigliani and Miller Suggest That the Value of the Firm