What Is the Dividend Irrelevance Theory?

Dividend irrelevance theory (also known as MM theory) believes that under certain assumptions, dividend policy will not have any impact on the value of the company or the price of the stock. The stock price of a company is completely determined by the profitability and risk combination of the company's investment decisions, and has nothing to do with the company's profit distribution policy. This theory is based on the complete market theory.

Dividend-independence

Right!

Dividend-irrelevance theory (also known as MM theory) holds that in a certain

But Momi's theory is based on the assumption of perfecting the capital market. This includes (1) perfect competition assumptions.

Dividend irrelevance theory holds that dividend distribution will not affect the company's market value (or stock price). The theory of dividend irrelevance holds that: 1. Investors do not care about the company's dividend distribution. If the company retains more profits for reinvestment, it will cause the company's stock price to rise; at this time, although the dividend is low, investors who need to use cash can sell the stock in exchange for cash. If the company pays more dividends, investors can use cash to buy more stocks to expand investment. In other words, investors have no preference for dividends and capital gains. 2. The dividend payout ratio does not affect the value of the company. Since investors do not care about the distribution of dividends, the value of a company is completely determined by the profitability of its investment. The distribution of the company's surplus among the retained earnings of dividends does not affect the value of the company.