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

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  • Neugebauer, Tibor
  • Shachat, Jason
  • Szymczak, Wiebke

Abstract

Modigliani and Miller showed the market value of the company is independent of its capital structure, and suggested that dividend policy makes no difference to this law of one price. We experimentally test the Modigliani-Miller 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 payment order is either identical 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 an arbitrageur when dividends are identical. The law of one price breaks down when dividend payment order is independent unless there is arbitrageur participation.

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  • Neugebauer, Tibor & Shachat, Jason & Szymczak, Wiebke, 2023. "A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets," Journal of Banking & Finance, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426623000390
    DOI: 10.1016/j.jbankfin.2023.106814
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    Cited by:

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    More about this item

    Keywords

    Modigliani-Miller; Arbitrage; Dividends; Experiment; Asset market;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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