Distributions, the UK Companies Act of 2006, and the Miller and Modigliani (1961) dividend irrelevance argument

The purpose of this paper is to offer a viewpoint on the 1961 scientific method and research methodology used by Miller and Modigliani to derive the conclusion that dividends are irrelevant, with reference to the UK Companies Act of 2006, specifically Sections 829‐840 that concern distributions, and Section 172 that stipulates the duties of the directors in their promotion of the success of the company.

The relevant sections of the UK Companies Act of 2006 concerning distributions and the duty of directors to promote the success of the company were studied. It was followed by a detailed analysis of the article by Miller and Modigliani, in particular the purpose, assumptions, the 30 equations that comprise their model, and their interpretive logic in drawing conclusions from their equations.

In effect, Miller and Modigliani exclude dividends as a determinant of share value, side‐step the purpose of their research, do not state assumptions upon which their analysis and interpretations are reliant, and disregard the conceptual difference between income and capital. On the basis of their interpretive logic not only is the dividend decision irrelevant but so too is the financing decision and important aspects of company law. Nonetheless, the erroneous doctrinal view that is presented by Miller and Modigliani continues to have obstinately resolute adherents, as evidenced by its uncritical presentation in authoritative textbooks on financial management.

This paper's view is that the continued uncritical presentation of Miller and Modigliani cannot be justified as an approach consistent with sound research methodology.