The dividend policy of a firm is irrelevant in a perfect capital market because the shareholder can effectively undo the firm’s dividend strategy. If a shareholder receives a greater dividend than desired, he or she can reinvest the excess. Conversely, if the shareholder receives a smaller dividend than desired, he or she can sell off extra shares of stock. This argument is due to MM and is similar to their homemade leverage concept, discussed in a previous chapter.

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