A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets

Tibor Neugebauer, Jason Shachat and Wiebke Szymczak Wiebke Szymczak
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Wiebke Szymczak Wiebke Szymczak: University of Hamburg

Working Papers from Chapman University, Economic Science Institute

Abstract: Modigliani and Miller showed that the market value of the company is in- dependent of its capital structure, and suggested that dividend policy makes no di erence to this law of one price. We experimentally test the MM theorem in a complete market with two simultaneously traded assets, employing two experimental treatment variations. The first variation involves the dividend stream. According to this variation the dividend payout order is either identi- cal or independent. The second variation involves the market participation, or not, of an algorithmic arbitrageur. We find that Modigliani-Miller's law of one price can be supported on average with or without arbitrageur when dividends are identical. The law of one price breaks down when dividend payout order is independent unless the arbitrageur keeps the asset prices in balance.

Keywords: Modigliani-Miller; arbitrage; dividends; experiment; asset market (search for similar items in EconPapers)
JEL-codes: C92 G32 G35 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cfn and nep-exp
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Citations: View citations in EconPapers (2)

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Journal Article: A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:20-14

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