Yes, After All, In an MM World, Dividends are Irrelevant

Abstract

DeAngelo and DeAngelo (2006, The irrelevance of the MM dividend irrelevance theorem, Journal of Financial Economics 79, 293-316) correctly show that Miller-Modigliani dividend irrelevance proof is incomplete and inadequate, as it assumes 100% FCF distribution and does not allow FCF retention. At the same time, they claim that, if retention is allowed, payout policy is not irrelevant, even in an MM world. This last proposition is wrong. If the assumptions that support Modigliani-Miller leverage irrelevance propositions hold, FCF retention cannot decrease firm market value. Otherwise, risk free arbitrage opportunities would emerge. This paper resuscitates MM dividend irrelevance proposition, extends it to the general case when retention is allowed, and proves that what we have believed, without a proper justification, for the last forty five years, is, fortunately, true: if the NPV of investment policy is fixed, payout policy is irrelevant in a frictionless world, even when allowing for retention.