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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&le, 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$e !uarterly cash
payments. Gor e&le, >&&on paid total dividends of H+.-1 per share
in +11, in !uarterly installments if H.+, H.+, H.+, and
H.
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Dividend Policy -
dividend stays with the stoc$ 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$e bonds (i.e. paid a
regular and stable dividend). Gor e&le, *an$ 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$ly, they positively abhor
the prospect of reducing dividends, for several reasons (ee
et. al, 1-- p.3). Girst, many individuals and institutions
re!uire large cash flows from their investments. Gor e&le,
retired people in lower ta& brac$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%$io Poli! =2ith this policy, a constant
percentage of earnings is paid out of in dividends. Gor
e&le, a company may pay half of its earnings in dividends.
5f course, a policy such as this ma$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&le, 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&le, many corporations had accumulated considerable
amounts of cash from cutbac$s, restructuring, and implementation of
other costCsaving measures. 4onse!uently, dividend increases were
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Dividend Policy +
substantial during that year as corporations could not reinvest the
internally generated cash flows profitably.
"nd according to asher (+; p./
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Dividend Policy +1
Granco odigliani and erton iller also pioneered this view,
and it is similar in nature to their view that capital structure is
irrelevant. #pecific dividend policies, then, should also be
irrelevant. 7owever, given that firms adopt such policies,
odigliani and iller argue that a clientele effect will develop,
which means that certain dividend policies will attract certain
types of investors (clientele). Gor e&le, companies with generous
dividends attract investors see$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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Dividend Policy 9+
-. Books8
asher, 2.B. (+;). Practical Financial Management Fifth Edition.
5hio, N#".
ee, 4.G., Ginnerty, .>., Jorton, >.". (1--). Foundations of
Financial Management. #t. Paul, innesota, N#".
#him, .O, #iegel, .A., (+). Schaums Outline of Financial
Management Third Edition. cArawC7ill 4ompanies, N#".
@an 7orne, .4. (++). Financial Management & Policy 12thEdition.
Jew ersey, N#".
2inger, *.., ohan, J. (1--1).Princiles of Financial Management.
Jew or$, N#".
+. E+Re/e)enes:
"lCal$awi, 7.J., Bafferty, ., Pillai, B. (+1). !i"idend Policy#
$ %e"ie of Theories and Emirical E"idence. Betrieved from
http:88www.euro6ournals.com8ibbaQ-Q13.pdf
"llen, G., ichaely, B. !i"idend Policy. Betrieved from
http:88finance.wharton.upenn.edu8Rrlwctr8papers8-313.pdf
http://www.eurojournals.com/ibba_9_14.pdfhttp://finance.wharton.upenn.edu/~rlwctr/papers/9414.pdfhttp://www.eurojournals.com/ibba_9_14.pdfhttp://finance.wharton.upenn.edu/~rlwctr/papers/9414.pdf8/10/2019 Term Paper - Dividend Policy
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Dividend Policy 99
Oothari, @., !i"idend Policy. Betrieved from
http:88www.vinod$othari.com8tutorials8dividendL+policy.pdf
Ouhlemeyer, A.". (+3), !i"idend Policy 'Poer Point Slides).
Betrieved from
wps.pearsoned.co.u$8wps8media8ob6ects8...8+9/;