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

Author

Listed:
  • Tibor Neugebauer

    (University of Luxumbourg)

  • Jason Shachat

    (Durham University and Wuhan University)

  • Wiebke Szymczak

    (University of Hamburg)

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.

Suggested Citation

  • Tibor Neugebauer & Jason Shachat & Wiebke Szymczak, 2020. "A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets," Working Papers 20-14, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:20-14
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/309/
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    Cited by:

    1. Corgnet, Brice & DeSantis, Mark & Siemroth, Christoph, 2023. "Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach," Economics Discussion Papers 36273, University of Essex, Department of Economics.
    2. Arturo Macias, 2022. "Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1418-1440, November.
    3. Angerer, Martin & Neugebauer, Tibor & Shachat, Jason, 2023. "Arbitrage bots in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 262-278.

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    Keywords

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    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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