The Dividend Irrelevance Proposition

Assume:

1. No taxes
2. No transaction costs
3. Fixed real investment policy
4. Fixed borrowing decisions

Question: What happens if we want to increase dividends?

• we must issue new shares to pay for the extra dividend, but
• issuing new shares reduces the claim of old shareholders, so
• old shareholders get the dividend, but they also end up with a reduced claim on the firm; in other words:
• the gain from the dividend is exactly offset by the reduction in value of the claim on the firm.

Example

Question: Are there any other ways to motivate dividend irrelevance?