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A Re-examination of the MM Capital Structure Irrelevance Theorem: A Partial Payout Approach

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Author(s): Mondher Kouki

Journal: International Journal of Business and Management
ISSN 1833-3850

Volume: 6;
Issue: 10;
Date: 2011;
Original page

ABSTRACT
Contrary to Modigliani and Miller (1958, MM hereafter), Capital Structure is not irrelevant when we consider afirm with a dividend payout policy. This article extends the MM capital structure theorem by relaxing the fullpayout assumption and introducing retention policy. The theoretical contribution shows that it is possible toverify the theorem when we suppose an investor who exchanges his initial holding for another portfoliocomposed of consumption and investment. The empirical analysis of this new approach is based on a data set ofthe USA Electric Utilities and Oil companies for the period 1990-1998. The results show that the relationshipsbetween leverage and firm value are significantly affected by the firm’s payout ratio. This finding is largelyinconsistent with MM’s view that the division of a stream between cash dividend and retained earnings is a meredetail in dealing with the irrelevance of capital structure.
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