term paper - dividend policy

8/10/2019 Term Paper - Dividend Policy

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Dividend Policy 1

I. INTRODUCTION

In corporate finance, the finance manager is generally thought to

face two operational decisions: the investment (or capital budgeting)

and the financing decisions. he capital budgeting decision is

concerned with what the real assets the firm should ac!uire while the

financing decision is concerned with how these assets should be

financed. " third decision may arise, however, when the firm begins to

generate profits. #hould the firm distribute all proportion of earned

profits in the form of dividends to the shareholders, or should it be

ploughed bac$ into the business% Presumably, in ta$ing any course of

action, managers should concentrate on how to ma&imi'e the wealth of

shareholders for whom the firm is being managed. anagers must not

only consider the !uestion of how much of the companys earnings are

needed for investment, but also ta$e into consideration the possible

effect of their decisions on share prices (*ishop et al., +).

he issue of dividend policy remains one of the most contested

issues in finance. he study of dividend policy has captured the

attention of finance scholars since the middle of the last century.

hey have attempted to solve several issues pertaining to dividends

and formulate theories and models to e&plain corporate dividend

behavior.

he dividend enigma has not only been an enduring issue in

finance, it also remains unresolved. "lmost three decades ago *lac$

(1-/) described it as a 0pu''le, and since then an enormous amount


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Dividend Policy +

of research has occurred trying to solve the dividend pu''le. "llen

*ernardo and 2elch (+, p.+3--) summari'ed the current consensus

view when they included 0"lthough a number of theories have been put

forward in the literature to e&plain their pervasive presence,

dividends remain one of the thorniest pu''les in corporate finance.

4onse!uently, several !uestions arise regarding dividends and

dividend policies as a whole. 5ne of these !uestions would be, 02hy do

firms pay dividends%. his is a !uestion most of the people,

especially those who own a part of a company or a stoc$ holder of that

company, usually as$. hey thin$ that for every dollar they receive in

dividends, thats one less dollar the firm can use to reinvest in new

assets or products. "nd the firm might end up borrowing more money or

issuing new shares to invest in capital pro6ects because its giving

them dividends. 2hat some of them dont li$e about dividends is this:

If they receive a dividend chec$, they have to pay ta&es on it. heyd

6ust as soon have the firm $eep the money and reinvest it wisely. 5r

maybe use it to buy bac$ shares of stoc$, so the price of their shares

will rise.

7ow do dividends affect the value of a company% 5r do they not

affect it at all% 2hy do some firms pay dividends while others dont%

hese and other related topics are the sub6ect of this research8 term

paper.


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Dividend Policy 3

>!uation 1:

2here: P0 ? todays stoc$ price

Di ? dividend in the ith year ( i ? 1, +, . . . , n)

Pn ? the selling price of the stoc$ in the nth year

k ? the e&pected return on e!uity

b. he 2hole ar$et @iew = Developing the above e!uation to come

up with the whole mar$et focus, we simply replace Pn with the

present value of the remaining dividends stretching infinitely

into the future. he buyer in year 0n would have a model in

mind similar to e!uation 1, and replacing Pn with that model

would conceptually push the selling price further into the

future. his mental process can be applied as many times as

possible to get the eventual selling price infinitely distant

in time, at which point its present value would be 'ero. hus,

we could wor$ with a model that had an infinite dividend

stream rather than a finite stream followed by a price.

"lthough some academic factions have argued that dividend

does not affect the value of the firm, still other groups of

academics have argued that dividends are the only factor that

determines firm value. his shows up in Aordons constant

dividend growth model for a share of common stoc$:


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Dividend Policy !uation +:

"ccording to the Aordon model, if the firm increases its

cash dividend, the price of its stoc$ will increase. Bemember,

however, that any increase in the dividend is a reduction in

retained earnings, which causes a lower growth rate, g, for the

firm. "ccording to the model, a lower growth rate reduces the

firms stoc$ price, so the optimal dividend policy must balance

the effects of these two variables to ma&imi'e the stoc$ price.

In managing a firms capital structure, financial managers

are concerned with raising funds in a leastCcost manner.

Ironically, while the process of raising funds is going on, funds

also are being distributed to shareholders in the form of

dividends. 5n the surface, the whole operation appears

counterproductive and a waste of time (if not money). It may be

simpler to raise funds when they are needed and pay dividends

only when e&cess funds are available. Indeed, many financial

managers follow such an approach, but many do not. 5bviously,

paying dividends is a comple& issue and, as is the case for

optimi'ing capital structure, is not easily resolved. 2inger

ohan (1--1, p.


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Dividend Policy /

firmE and (+) establishing specific dividendCpaying policies that

are maintained even if internal earnings cannot sustain them.

+. 2hat is a Dividend Policy%

he theoretical issues surrounding the dividends, are, as yet,

unresolved and most li$ely will remain that way in the future.

7owever, the behavior of many companies indicates that they believe

that dividends are relevant. " large number of firms, probably a

ma6ority, adopt a specific dividend poli!.

Dividend Policy is the decision a firm ma$es to pay out

earnings or retain them for reinvestment in the firm. he term

Fdividend policyF also refers to Fthe practice that management

follows in ma$ing dividend payout decisions or, in other words, the

si'e and pattern of cash distributions over time to shareholdersF

(ease et al., +, p. +-). If it pays out dividends, company must

determine the amount to pay out and the amount to retain. wo

!uestions drive a firms dividend policy: Does the dividend policy

have an effect upon the firms value% If so, will the firm try to

achieve an optimal payout ratio by attaining an ideal dollar payment

per share% hese !uestions have spar$ed debate between practitioners

and academicians for many years. Practitioners see an optimal level

of dividend payout, whereas some academic factions have argued that

dividend policy does not affect the value of the firm at all.


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Dividend Policy

" companys dividend policy is important for the following

reasons (#him #iegel, + p.99):

1. It bears upon investor attitudes. Gor e&ample, stoc$holders

loo$ unfavorably upon the corporation when dividends are cut,

since they associate the cutbac$ with corporate financial

problems. Gurther, in setting a dividend policy, management

must ascertain and fulfill the ob6ectives of its owners.

5therwise, the stoc$holders may sell their shares, which in

turn may bring down the mar$et price of the stoc$. #toc$holder

dissatisfaction raises the possibility that control of the

company may be sei'ed by an outside group.

+. It impacts the financing program and capital budget of the

firm.

9. It affects the firms cash flow position. " company with a

poor li!uidity position may be forced to restrict its dividend

payments.

3. It lowers stoc$holders e!uity, since dividends are paid from

retained earnings, and so results in a higher debtCtoCe!uity

ratio.

If a companys cash flows and investment re!uirements are

volatile, the company should not establish a high regular dividend.

It would be better to establish a low regular dividend that can be

met even in years of poor earnings.


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Dividend Policy ;

"t this point you may as$, how do firms pay dividends% Girms

can disburse dividends in many forms, but most ma$e !uarterly cash

payments. Gor e&ample, >&&on paid total dividends of H+.-1 per share

in +11, in !uarterly installments if H.+, H.+, H.+, and

H.


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Dividend Policy -

dividend stays with the stoc$ until + days before the date

of record. hat is, in the second day prior to the record

date, the right to the dividend is no longer with the

shares, and the seller, not the buyer of that stoc$, is the

one who will receive the dividend. he mar$et price of the

stoc$ reflects that it has gone e&Cdividend and will

decrease by appro&imately the amount of dividend.

3. Payment Date = his is the date when the company distributes

its dividend chec$s to its stoc$holders.

Dividends are usually paid in cash. " cash dividend is

typically e&pressed in dollars and cents per share. 7owever, the

dividend on preferred stoc$ is sometimes e&pressed as a percentage

of par value. #ome companies allow stoc$holders to automatically

reinvest their dividend in corporate shares instead of receiving

cash. he advantage to the stoc$holder is that he or she avoids the

bro$erage fees associated with buying new shares. 7owever, there is

no ta& advantage since the stoc$holder must still par ordinary

income ta&es on the dividend received.


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Dividend Policy 11

this was accomplished by, among other things, the payment of 0generous

dividends (*as$in, 1-;;). "s a result, these companies began trading

as going concern entities, and distributing only the profits rather

than the entire invested capital. he emergence of firms as a 0going

concern initiated the fundamental practice of firms to decide what

proportion of the firms income (rather than assets) to return to

investors and produced the first dividend payment regulations

(Gran$furter and 2ood, 1--). Aradually, corporate charters began to

restrict the payments of dividends to the profits only.

he ownership structure of shipping firms gradually evolved into

a 6oint stoc$ company form of business. *ut it was chartered trading

firms more generally that adopted the 6oint stoc$ form. In 1/19, the

*ritish >ast India 4ompany issued its first 6oint stoc$ shares with a

nominal value. 0Jo distinction was made, however, between capital and

profit (2al$er, 1-91, p.1+). In the seventeenth century, the success

of this type of trading company seemed poised to allow the spread of

this form of business organi'ation to include other activities such as

mining, ban$ing, clothing, and utilities. Indeed, in the early 1s,

e&citement about the possibilities of e&panded trade and the corporate

form saw a speculative bubble form, which collapsed spectacularly when

the #outh #ea 4ompany went into ban$ruptcy. he *ubble "ct of 111

effectively slowed, but did not stop, the development of the corporate

form in *ritain for almost a century (2al$er, 1-91).


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Dividend Policy 1+

In the early stages of corporate history, managers reali'ed the

importance of high and stable dividend payments. In some ways, this

was due to the analogy investors made with the other form of financial

security then traded, namely government bonds. *onds paid a regular

and stable interest payment, and corporate managers found that

investors preferred shares that performed li$e bonds (i.e. paid a

regular and stable dividend). Gor e&ample, *an$ of Jorth "merica in

1;1 paid dividends after only si& months of operation, and the ban$

charter entitled the board of directors to distribute dividends

regularly out of profits. 0Paying consistent dividends remained of

paramount importance to managers during the first half of the 1-th

century (Gran$furter and 2ood, 1--, p.+3)

In addition to the importance placed by investors on dividend

stability, another issue of modern corporate dividend policy to emerge

early in the nineteenth century was that dividends came to be seen as

an important form of information. he scarcity and unreliability of

financial data often resulted in investors ma$ing their assessments of

corporations through their dividend payments rather than reported

earnings. In short, investors were often faced with inaccurate

information about the performance of a firm, and used dividend policy

as a way of gauging what managements views about future performance

might be. 4onse!uently, an increase in divided payments tended to be

reflected in rising stoc$ prices. "s corporations became aware of this

phenomenon, it raised the possibility that managers of companies could

use dividends to signal strong earnings prospects and8or to support a


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Dividend Policy 19

companys share price because investors may read dividend

announcements as a pro&y for earnings growth.

o summari'e, the development of dividend payments to

shareholders has been tied up with the development of the corporate

form itself. 4orporate managers reali'ed early the importance of

dividend payments in satisfying shareholders e&pectations. hey often

smoothed dividends over time believing that dividend reductions might

have unfavorable effects on share price and therefore, used dividends

as a device to signal information to the mar$et. oreover, dividend

policy is believed to have an impact on share price. #ince the 1-


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Dividend Policy 13

*elow are the various and most common types of dividend polices.

1. S$%&le Dividend Poli!= any companies use stable dividendC

perCshare policy since it is loo$ed upon favorably by

investors. Dividend stability implies lowCris$ company. >ven

in a year that the company shows a loss rather than profit the

dividend should be maintained to avoid negative connotations

to current and prospective investors. *y continuing to pay,

the shareholders are more apt to the loss as temporary. #ome

stoc$holders rely on the receipts of stable dividends for

income. "nd according to #him #iegel (+ p.99;), a stable

dividend policy is also necessary for a company to be placed

on a list of securities in which financial institutions

(pension funds, insurance companies) invest. *eing on such a

list provides greater mar$etability for corporate shares.

anagers resist increasing dividends if they do not

e&pect to maintain the increase in the future. If firms

hesitate to raise dividends too !uic$ly, they positively abhor

the prospect of reducing dividends, for several reasons (ee

et. al, 1-- p.3). Girst, many individuals and institutions

re!uire large cash flows from their investments. Gor e&ample,

retired people in lower ta& brac$ets generally covet high

dividend payments. #econd, managers often resist reducing

dividends also because a cut in dividends may be interpreted

by the investment community as a signal of trouble with the


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Dividend Policy 1ven if the reduction is

intended to allow the firm to pursue an attractive

opportunity, it may adversely affect stoc$ prices. " third

reason involves the legal list. any large, institutional

investors are bound by the prudent man rule, or by

legislation, to buy only securities that are included on the

legal list. 5ne criterion of the list is a long history of

continued dividend payments without dividend reductions.

herefore, a firm that reduces or omits a dividend payment

faces the ris$ of being ineligible for purchases by certain

institutional investors.

" stable dividend policy can become a sort of selfC

fulfilling prophecy (ee et.al, 1-- p.3). "n une&pected

rise or reduction in dividends can have an announcement effect

on the firms share price. "n increase in dividends may lead

investors to perceive a promising future and share price may

increase. " drop in dividends may lead investors to fear a

less promising future, resulting in a drop in share price.

+. Cons$%n$ P%!o'$ R%$io Poli! =2ith this policy, a constant

percentage of earnings is paid out of in dividends. Gor

e&ample, a company may pay half of its earnings in dividends.

5f course, a policy such as this ma$es dividends as volatile

as earnings. *ecause net income varies, dividends paid will

also vary using this approach. he problem this policy causes


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Dividend Policy 1/

is that if a companys earnings drop drastically or there is a

loss, the dividends paid will sharply curtailed or nonC

e&istent. "nd in years of negative earnings, the policy must

be abated since dividends cannot be less than 'ero. his

policy will not ma&imi'e mar$et price per share since most

stoc$holders do not want variability in their dividend

receipts.

9.A Co(p)o(ise Poli!* S$%&le Dividend Pl's Ye%)+End E,$)%

Poli!= his is somewhat of a combination of the other two.

he idea is to establish a minimum dividend in relation to a

companys longCrun earnings, supplemented by an e&tra yearCend

dividend during superior earning years.

oreover, this is a compromise between the policies of a

stable dollar amount and a percentage amount of dividends is

for a company to pay low dollar amount per share plus a

percentage increment in good years. 2hile this policy affords

fle&ibility, it also creates uncertainty in the minds of

investors as to the amount of dividends they are li$ely to

receive. #toc$holders generally do not li$e such uncertainty.

7owever, the policy may be appropriate when earnings vary

considerably over the years. he percentage, or e&tra, portion

of the dividend should not be paid regularlyE otherwise it

becomes meaningless.


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Dividend Policy 1

3. Resid'%l+dividend Poli! = 2hen a companys investment

opportunities are not stable, management may want to consider

a fluctuating dividend policy. 2ith this $ind of policy the

amount of earnings retained depends upon the availability of

investment opportunities in a particular year. Dividends paid

represent the residual amount from earnings after the

companys investment needs are fulfilled.

I". THEORIES ABOUT DI"IDEND PO#ICY

he previous statements established that dividend policy was

bound up with the development of the corporate form itself. It was

seen that the emergence of dividend policy as important to investors

was, to some e&tent, driven by the evolving state of financial

mar$ets. Investing in shares was initially seen as analogous to bonds,

so regularity of payments was important. It was also seen that in the

absence of regular and accurate corporate reporting, dividends were

often preferred to reinvested earnings, and often even regarded as a

better indication of corporate performance than published earnings

accounts. 7owever, as financial mar$ets developed and became more

efficient, it was thought by some that dividend policy would become

increasingly irrelevant to investors. 2hy dividend policy should

remain so evidently important has been theoretically controversial.

hree main contradictory theories of dividends can be identified.

#ome argue that increasing dividend payments increases a firms value.


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Dividend Policy 1;

"nother view claims that high dividend payouts have the opposite

effect on a firms valueE that is, it reduces firm value. he third

theoretical approach asserts that dividends should be irrelevant and

all effort spent on the dividend decision is wasted. hese views are

embodied in three theories of dividend policy: high dividends increase

share value theory (or the soCcalled KbirdCinCtheC hand argument),

low dividends increase share value theory (the ta&Cpreference

argument), and the dividend irrelevance hypothesis. Dividend debate is

not limited to these three approaches. #everal other theories of

dividend policy have been presented, which further increases the

comple&ity of the dividend pu''le. #ome of the more popular of these

arguments include the residual theory of dividends, information

content of dividends (signalling), the clientele effects, and the

agency cost hypotheses.

7owever, I only limit my scope to these four (3) most important

theories of Dividend Policy.

-. Resid'%l Teo)! o/ Dividends

he most easily understood theory of dividend payment

determination is called the residual theory. "s the name implies,

this theory holds that firms pay dividends out of earnings that

remain after its financing needs. hese are funds for which the firm

has no immediate use. he procedure for a residual dividend policy

follows several steps (ee et al., 1-- p.3/-):


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Dividend Policy 1-

1.1. Determine the firms optimal capital budget.

1.+. Determine the amount of e!uity needed to finance that

budget.

1.9. o the e&tent possible, use the firms retained earnings to

supply the needed e!uity.

1.3. Distribute any leftover earnings as dividends.

he basic assumption of residual theory is that shareholders

want the firm to retain earnings if reinvesting them can generate

higher rates of return than the shareholders could obtain by

reinvesting their dividends. Gor e&ample, if a corporation can

invest retained earnings in a new venture that generates 1;L rate of

return, whereas investors can obtain a return of only 1L by

reinvesting their dividends, then stoc$holders would benefit more

from the firm reinvesting its profits.

he residual theory of dividends also maintains that companies

should pay dividends only when cash flows cannot be invested

profitably within the firm. his approach is a logical e&tension of

the unlimited funds assumption in capital budgeting and is

incorporated in pro6ect evaluation techni!ues employing the cost of

capital. 4ompanies do follow the residual approach to some degree.

In 1-;-, for e&ample, many corporations had accumulated considerable

amounts of cash from cutbac$s, restructuring, and implementation of

other costCsaving measures. 4onse!uently, dividend increases were


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Dividend Policy +

substantial during that year as corporations could not reinvest the

internally generated cash flows profitably.

"nd according to asher (+; p./


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Dividend Policy +1

Granco odigliani and erton iller also pioneered this view,

and it is similar in nature to their view that capital structure is

irrelevant. #pecific dividend policies, then, should also be

irrelevant. 7owever, given that firms adopt such policies,

odigliani and iller argue that a clientele effect will develop,

which means that certain dividend policies will attract certain

types of investors (clientele). Gor e&ample, companies with generous

dividends attract investors see$ing high current income (such

retirees), where companies with low payouts appeal to investors

see$ing price appreciation.

7owever according to "lCal$awi, Bafferty,Pillai (+1), prior

to the publication of iller and odiglianis (1-/1, hereafter )

seminal paper on dividend policy, a common belief was that higher

dividends increase a firms value. his belief was mainly based on

the soCcalled 0birdCinCtheChand argument, discussed in more detail

shortly. Araham and Dodd (1-93), for instance, argued that 0the sole

purpose for the e&istence of the corporation is to pay dividends,

and firms that pay higher dividends must sell their shares at higher

prices (cited in Gran$furter et al., ++, p.++). 7owever, as part

of a new wave of finance in the 1-/s, demonstrated that under

certain assumptions about perfect capital mar$ets, dividend policy

would be irrelevant.


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Dividend Policy ++

Aiven that in a perfect mar$et dividend policy has no effect

on either the price of a firms stoc$ or its cost of capital,

shareholders wealth is not affected by the dividend decision and

therefore they would be indifferent between dividends and capital

gains. he reason for their indifference is that shareholder wealth

is affected by the income generated by the investment decisions a

firm ma$es, not by how it distributes that income. herefore, in

s world, dividends are irrelevant. argued that regardless of

how the firm distributes its income, its value is determined by its

basic earning power and its investment decisions. hey stated that

0Mgiven a firms investment policy, the dividend payout policy it

chooses to follow will affect neither the current price of its

shares nor the total returns to shareholders (p.313). In other

words, investors calculate the value of companies based on the

capitali'ed value of their future earnings, and this is not affected

by whether firms pay dividends or not and how firms set their

dividend policies. go further and suggest that, to an investor,

all dividend policies are effectively the same since investors can

create 0homemade dividends by ad6usting their portfolios in a way

that matches their preferences.

based their argument upon idealistic assumptions of a

perfect capital mar$et and rational investors. he assumptions of a

perfect capital mar$et necessary for the dividend irrelevancy

hypothesis can be summari'ed as follows: (1) no differences between

ta&es on dividends and capital gainsE (+) no transaction and


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Dividend Policy +9

flotation costs incurred when securities are tradedE (9) all mar$et

participants have free and e!ual access to the same information

(symmetrical and costless information)E (3) no conflicts of

interests between managers and security holders (i.e. no agency

problem)E and (


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Dividend Policy +3

5ne alternative and older view about the effect of dividend

policy on a firms value is that dividends increase firm value. In a

world of uncertainty and imperfect information, dividends are valued

differently to retained earnings (or capital gains). Investors

prefer the 0bird in the hand of cash dividends rather than the 0two

in the bush of future capital gains. Increasing dividend payments,

ceteris paribus, may then be associated with increases in firm

value. "s a higher current dividend reduces uncertainty about future

cash flows, a high payout ratio will reduce the cost of capital, and

hence increase share value. hat is, according to the soCcalled

0birdCinCthe hand hypothesis (henceforth *I77) high dividend payout

ratios ma&imi'e a firms value.

(1-/1) have critici'ed the *I77 and argued that the firms

ris$ is determined by the ris$iness of its operating cash flows, not

by the way it distributes its earnings. 4onse!uently, called

this argument the birdCinCtheChand fallacy. Gurther, "lCal$awi et

al. (+1), cited that *hattacharya (1--) suggested that the

reasoning underlying the *I77 is fallacious. oreover, he suggested

that the firms ris$ affects the level of dividend not the other way

around. hat is, the ris$iness of a firms cash flow influences its

dividend payments, but increases in dividends will not reduce the

ris$ of the firm.


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Dividend Policy +arnings stability = " company within stable earnings is more

li$ely to distribute a higher percentage of its earnings than one

with unstable earnings.


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Dividend Policy +;

dividend payout ratio. 2hen there is a limitation to e&ternal

sources of funds, more earnings will be retained for planned

financial needs.

;. Nncertainty = Payment of dividends reduces the chance of

uncertainty in stoc$holders minds about the companys financial

health.

-. "ge and si'e = he age and si'e of the company bear upon its ease

of access to capital mar$ets.

1. a& penalties = Possible ta& penalties for e&cess

accumulation of retained earnings may result in high dividend

payouts.

"I. OTHER TYPES OF SHAREHO#DER DISTRIBUTIONS

In the main, we are concerned with cash dividends when the topics

of dividend policy are discussed. 7owever, there are other types of

shareholder distributions the we should understand.

1. S$ok Dividends= " stoc$ dividend is the issuance of additional

shares of stoc$ to stoc$ holders. " stoc$ dividend may be

declared when the cash position of the firm is inade!uate and8or

when the firm wishes to prompt more trading of its stoc$ by

reducing its mar$et price. 2ith a stoc$ dividend, retained

earnings decrease but common stoc$ and paidCin capital on common

stoc$ increase by the same amount. " stoc$ dividend, therefore,

provides no change in stoc$holders wealth (asher, +; p.93).


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Dividend Policy +-

#toc$ dividends increase the shares held, but the proportion of

the company each stoc$holder owns remains the same. In other

words, if a stoc$holder has +L interest in the company before a

stoc$ dividend, he or she will continue to have a +L interest

after the stoc$ dividend.

+. S$ok Spli$= " stoc$ split involves issuing a substantial amount

of additional shares and reducing the par value of the stoc$ on a

proportional basis. " stoc$ split is often prompted b a desire to

reduce the mar$et price per share, which will ma$e it easier for

small investors to purchase shares.

he similarities between a stoc$ dividend and a stoc$ split are:

+.1. 4ash is not paid.

+.+. #hares outstanding increase.

+.9. #toc$holders e!uity remains the same.

9. S$ok Rep')%ses = reasury stoc$ is the name given to

previously issued stoc$ that has been purchased by the company.

*uying treasury stoc$ is an alternative to paying dividends.

#ince outstanding shares will be fewer after stoc$ has been

repurchased, earnings per share will rise (assuming net income is

held constant). he increase in earnings per share may result in

a higher mar$et price per share.


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Dividend Policy 9

o stoc$holders, the advantages arising from a stoc$

repurchase include the following (asher, + p.931): (1) If

mar$et price per share goes up as a result of their purchase,

stoc$holders can ta$e advantage of the capital gain deduction.

his assumes the stoc$ is held more them one year and is sold at

a gain. (+) #toc$holders have the option of selling or not

selling the stoc$, while id a dividend is paid, stoc$holders must

accept it and pay ta&.

"II. CONC#USION

he conclusion is that we dont really have a conclusion. Jo

one $nows with certainty whether paying more or less in dividends

generally increases or decreases stoc$ prices. ost practicing

financial professionals feel dividends have a positive effect on

prices. #cholars tend to say that notion cant really be proven.

he literature on dividend policy has produced a large body

of theoretical and empirical research, especially following the

publication of the dividend irrelevance hypothesis of (1-/1).

Jo general consensus has yet emerged after several decades of

investigation, and scholars can often disagree even about the

same empirical evidence. In perfect capital mar$ets, asserted

that the value of a firm is independent of its dividend policy.

7owever, various mar$et imperfections e&ist (ta&es, transaction

costs, information asymmetry, agency problems, etc) and these


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Dividend Policy 91

mar$et imperfections have provided the basis for the development

of various theories of dividend policy including ta&Cpreference,

clientele effects, signaling, and agency costs.

his paper began with an overview of the evolution of

corporate dividend policy. It was noted that dividend policy has

been bound up with the development and history of the corporation

itself. "lthough numerous studies have e&amined various issues of

dividend policy, they have produced mi&ed and inconclusive

results. Perhaps the famous statement of Gisher *lac$, cited by

"lCal$awi et al., (+1), about dividend policy Fthe harder we

loo$ at the dividends picture, the more it seems li$e a pu''le,

with pieces that 6ust do not fit togetherF (*lac$, 1-/, p.


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term paper - dividend policy

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