The correct answer is: D. Arbitrage.
The Modigliani-Miller (MM) model is a theory that states that in a perfect market, the value of a company is not affected by its dividend policy. This is because investors can always create their own dividend policy by buying or selling shares of the company.
Arbitrage is the practice of buying and selling assets in different markets in order to profit from small differences in price. In the context of the MM model, arbitrageurs would buy shares of a company that pays a high dividend and sell shares of a company that pays a low dividend. This would drive the prices of the two companies’ shares towards each other, until the dividend policy no longer had an impact on the companies’ values.
The other options are incorrect because they are not relevant to the MM model. Hedging is a strategy used to reduce risk, issue of debentures is a way for a company to raise money, and liquidity is the ease with which an asset can be bought or sold.