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Dividend and investor heterogeneity: clientele effect and tax effect

If some assumptions of Miller and Modigliani’s model are relaxed, it becomes possible to analyze whether the neutrality of dividend distribution still remains valid. One may then wonder to what extent market imperfections⁷ could render a dividend policy relevant in order to increase a firm’s value.

The problem can be divided into two questions. Are firms with the highest dividend yields more attractive for investors (clientele effect) than others? How does the share value react when a company decides to pay a dividend (ex-date effect and tax effect)?

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