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

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.

Citation

Neugebauer, T., Shachat, J., & Szymczak, W. (2023). A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets. Journal of Banking and Finance, 154(September), Article 106814. https://doi.org/10.1016/j.jbankfin.2023.106814

• Journal Article Type: Article
• Acceptance Date: Feb 17, 2023
• Online Publication Date: Feb 22, 2023
• Publication Date: 2023-09
• Deposit Date: Feb 21, 2023
• Publicly Available Date: Aug 23, 2024
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 154
• Issue: September
• Article Number: 106814
• DOI: https://doi.org/10.1016/j.jbankfin.2023.106814
• Public URL: https://durham-repository.worktribe.com/output/1178710