Dividend irrelevance and firm control

Abstract

We examine the ability of co-founders of a firm to create an artificial (or “homemade”) dividend as in Miller and Modigliani (1961). We employ traditional discounted valuation in showing that the act of creating an artificial dividend may decrease the value of the firm because it can divert funds from investment to the consumption of perquisites. Only where there is complete trust in the party to which the shares are sold can a co-founder costlessly create an artificial dividend. It seems likely that a dividend policy, idiosyncratic to the firm’s founders, would be established at the founding of the firm.

Citation

Dennis, S.A. and Smith, W.S. (2014), "Dividend irrelevance and firm control", Signs that Markets are Coming Back (Research in Finance, Vol. 30), Emerald Group Publishing Limited, Leeds, pp. 149-167. https://doi.org/10.1108/S0196-382120140000030010