Extension of the Miller and Modigliani Theory to Allow for Share Repurchases

Abstract

Miller and Modigliani (1961) consider valuation of infinite horizon firms that may not engage in purchasing their own shares. While their fundamental valuation approach also applies to firms that purchase their own shares, their stream of dividends approach does not apply to these firms if they do not distribute “sufficient” cash via dividends and share repurchases, as characterized by a necessary and sufficient condition. Also presented is a modified stream of dividends approach that provides an equivalent valuation of every firm that can be valued by the fundamental approach.


For related papers, see Sethi, When Does the Share Price Equal the Present Value of Future Dividends? A Modified Dividend Approach, Economic Theory, Vol. 8, No. 2, pp. 307-319, 1996 (http://ssrn.com/abstract=1083168) and Sethi, Derzko and Lehoczky, A Stochastic Extension of the Miller-Modigliani Framework, Mathematical Finance, Vol. 1, Issue 4, pp. 57-76, October 1991;(http://ssrn.com/abstract=1082940) both available on SSRN.

Keywords: valuation; share price; dividend approach; cash flow approach; MM theory; share repurchase

JEL Classification: D40, D46, G12, G31, G35, G3