Relevance or irrelevance of retention for dividend policy irrelevance

Carlo Alberto Magni

MPRA Paper from University Library of Munich, Germany

Abstract: In an interesting recent paper, DeAngelo and DeAngelo (2006) highlight that Miller and Modigliani's (1961) proof of dividend irrelevance is based on the assumption that the amount of dividends distributed to shareholders is equal or greater than the free cash flow generated by the fixed investment policy. They claim that, if retention is allowed, dividend policy is not irrelevant. This paper clarifies and reinterprets DeAngelo and DeAngelo's result: Retention itself has not to do with dividend irrelevance, which holds even in case of retention. The key assumption has to do with the NPV of the extra funds (either retained or raised): If NPV is zero, dividend irrelevance applies. Yet, the dichotomy retention/no-retention is useful, because if agency problems are present, managers tend to retain funds and invest them in negative-NPV projects, and therefore the zero-NPV assumption must be removed, so that dividend irrelevance does not apply any more.

Keywords: Dividend policy; irrelevance; retention; zero-NPV; epistemology; agency theory (search for similar items in EconPapers)
JEL-codes: G0 G30 G31 G35 (search for similar items in EconPapers)
Date: 2007-11-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/5591/1/MPRA_paper_5591.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/8384/1/MPRA_paper_8384.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/15689/1/MPRA_paper_15689.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:5591

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().