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

[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

Author, co-author :

NEUGEBAUER, Tibor ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Finance (DF)

Shachat, Jason

Szymczak, Wiebke

External co-authors :

yes

Language :

English

Title :

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

Publication date :

September 2023

Journal title :

Journal of Banking and Finance

ISSN :

0378-4266

eISSN :

1872-6372

Publisher :

Elsevier, Netherlands

Special issue title :

Experimental Finance

Volume :

154

Pages :

106814

Peer reviewed :

Peer Reviewed verified by ORBi

Additional URL :

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4010100

Available on ORBilu :

since 20 February 2023

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