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

Neugebauer, Tibor; Shachat, Jason; Szymczak, Wiebke

Authors

Tibor Neugebauer

Wiebke Szymczak



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

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