[en] 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.
Disciplines :
Finance
Auteur, co-auteur :
NEUGEBAUER, Tibor ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Finance (DF)
Shachat, Jason
Szymczak, Wiebke
Co-auteurs externes :
yes
Langue du document :
Anglais
Titre :
A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets
Abbink, K., Rockenbach, B., Option pricing by students and professional traders: a behavioural investigation. Managerial Decis. Econ. 27:6 (2006), 497–510.
Aldrich, E.M., Vargas, K.L., Experiments in high-frequency trading: comparing two market institutions. Exp. Econ., 2019, 1–31.
Angerer, M., Neugebauer, T., Shachat, J., Arbitrage bots in experimental asset markets. J. Econ. Behav. Organ. 206 (2023), 262–278.
Angerer, M., Szymczak, W., The impact of endogenous and exogenous cash inflows in experimental asset markets. J. Econ. Behav. Organ. 166 (2019), 216–238.
Asparouhova, E., Besliu, C., Lemmon, M., Rock, B., 2016. Payout policy, investor rationality, and market efficiency: evidence from laboratory experiments. Available from author's webpage.
Asparouhova, E. N., Bossaerts, P., Rotaru, K., Wang, T., Yadav, N., Yang, W., 2020. Humans in charge of trading robots: the first experiment. Available at SSRN 3569435.
Attanasi, G., Boun My, K., Guido, A., Lefebvre, M., Controlling monopoly power in a double-auction market experiment. J. Public Econ. Theory 23:5 (2021), 1074–1101.
Attanasi, G., Centorrino, S., Manzoni, E., Zero-intelligence versus human agents: an experimental analysis of the efficiency of double auctions and over-the-counter markets of varying sizes. J. Public Econ. Theory 23:5 (2021), 895–932.
Attanasi, G., Centorrino, S., Moscati, I., Over-the-counter markets vs. double auctions: acomparative experimental study. J. Behav. Exp. Econ. 63 (2016), 22–35.
Baghestanian, S., Lugovskyy, V., Puzzello, D., Traders’ heterogeneity and bubble-crash patterns in experimental asset markets. J. Econ. Behav. Organ. 117 (2015), 82–101.
Bao, T., Nekrasova, E., Neugebauer, T., Riyanto, Y.E., Algorithmic trading in experimental markets with human traders: a literature survey. Füllbrunn, S., Haruvy, E., (eds.) Handbook of Experimental Finance, 2022, 302–322.
Bossaerts, P., Plott, C., The CAPM in thin experimental financial markets. J. Econ. Dyn. Control 26:7–8 (2002), 1093–1112.
Bossaerts, P., Shachat, J., Xie, K., Arbitrage Opportunities: Anatomy and Remediation. Technical Report, 2018, Durham University.
Charness, G., Neugebauer, T., A test of the Modigliani-Miller invariance theorem and arbitrage in experimental asset markets. J. Finance 74:1 (2019), 493–529.
Crockett, S., Duffy, J., Izhakian, Y., An experimental test of the Lucas asset pricing model. Rev. Econ. Stud. 86:2 (2019), 627–667.
DeAngelo, H., DeAngelo, L., The irrelevance of the MM dividend irrelevance theorem. J. Financ. Econ. 79:2 (2006), 293–315.
Durand, D., The cost of capital, corporation finance, and the theory of investment: comment. Am. Econ. Rev. 49:4 (1959), 639–655.
Farjam, M., Kirchkamp, O., Bubbles in hybrid markets: how expectations about algorithmic trading affect human trading. J. Econ. Behav. Organ. 146 (2018), 248–269.
Gode, D.K., Sunder, S., Allocative efficiency of markets with zero-intelligence traders: market as a partial substitute for individual rationality. J. Polit. Economy 101:1 (1993), 119–137.
Greiner, B., Subject pool recruitment procedures: organizing experiments with ORSEE. J. Econ. Sci. Assoc. 1:1 (2015), 114–125.
Leal, S.J., Hanaki, N., et al. Algorithmic Trading, What if It is Just an Illusion? Evidence from Experimental Financial Markets. Technical Report, 2018, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of …
Levati, M.V., Qiu, J., Mahagaonkar, P., Testing the Modigliani-Miller theorem directly in the lab. Exp. Econ. 15:4 (2012), 693–716.
Lugovskyy, V., Puzzello, D., Tucker, S., Williams, A., Asset-holdings caps and bubbles in experimental asset markets. J. Econ. Behav. Organ. 107 (2014), 781–797.
Miller, M.H., The Modigliani-Miller propositions after thirty years. J. Econ. Perspect. 2:4 (1988), 99–120.
Miller, M.H., Modigliani, F., Dividend policy, growth, and the valuation of shares. J. Bus. 34:4 (1961), 411–433.
Modigliani, F., Miller, M.H., The cost of capital, corporation finance and the theory of investment. Am. Econ. Rev. 48:3 (1958), 261–297.
Modigliani, F., Miller, M.H., The cost of capital, corporation finance, and the theory of investment: reply. Am. Econ. Rev. 49:4 (1959), 655–669.
O'brien, J., Srivastava, S., Dynamic stock markets with multiple assets: an experimental analysis. J. Finance 46 (1991), 1811–1838.
Peng, Y., Shachat, J., Wei, L., Zhang, S.S., Speed Traps: Algorithmic Trader Performance Under Alternative Market Structures. Technical Report, 2022, Economic Science Institute, Chapman University.
Rietz, T.A., Behavioral Mis-Pricing and Arbitrage in Experimental Asset Markets. Technical Report, 2005, University of Iowa.
Stöckl, T., Huber, J., Kirchler, M., Bubble measures in experimental asset markets. Exp. Econ. 13:3 (2010), 284–298.
