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The Miller–Modigliani dividend irrelevance theory as a warning for investors looking for quick profits from investments in companies paying dividends


In 1961, Miller and Modigliani (M–M) published a dividend irrelevance theory, which shows that the payment of dividends does not make any changes to the value of the company. The assumption about the existence of the perfect market made by M–M became the basis for a common criticism of the theory, and the critics also tried to empirically prove that dividend payments have a positive effect on future stock prices. A different interpretation was presented by Damodaran (2007), who stated that a dividend is a compensation for lost capital gains on the first day without a dividend. The aim of the article is to verify the M-M theory according to the Damodaran approach based on the data of companies listed on the WSE in 2019–2021. For this purpose the calculations of the total rate of return on investments consisting in the purchase of shares at the end of the cum-dividend day and the sale of these shares at the end of the ex-dividend day were carried out. Then, the average values of the total rates of return in each of the three years were calculated and using the Student’s t-test it was examined whether the average of one-session rate of return is insignificantly different from zero. If so, it would mean that the dividend irrelevance theory is correct. In 2019 and 2021, the average total rates of return turned out to be statistically insignificant, which supports the M—M theory. The negative significant value of the average in 2020 may result from the COVID-19. The M–M theory perceived in this way can be a warning to investors looking for “quick profits” and trying to apply the strategy of buying dividend stocks at the cum-dividend day and selling them at the ex-dividend day.