Earnings,dividend policy,and present value relations: Building blocks of dividend policy invariant cash flows

In a Modigliani-Miller world, dividend policy is irrelevant for asset pricing. This article searches for cash flows with two characteristics: like dividends, asset prices can be calculated from their present values and, unlike dividends, they are invariant with respect to changes in dividend policy. Segmented and aggregate residual income measures with these features are identified under two assumptions: dividend policy does not alter risk premiums and income earned from investments associated with dividend policy includes unrealized capital gains and losses. The results hold for otherwise arbitrary risk premiums in the general no-arbitrage approach to the valuation of uncertain income streams.