BALANCING THE DISTRIBUTION OF INCOME:

FACTORS AFFECTING DECISION MAKING WITH REGARDS TO DIVIDEND POLICIES

1

Module: Accounting in Context

Course: Accounting & Finance

Date: February 4th 2015

Student Name: David KysonStudent Number: 12015699

Word Count: 4,244

BALANCING THE DISTRIBUTION OF INCOME:

FACTORS AFFECTING DECISION MAKING WITH REGARDS TO DIVIDEND POLICIES

EXECUTIVE SUMMARYThe following report has been produced to critically explore existing literature concerned with dividend and investment policies. It investigates the factors, both internal and external, that may act as motivators when private listed companies are in the decision making process of how best to distribute retained earnings.

Benefits have been deduced for the two differing distribution policies, whilst critiquing the supporting literature to create a balanced and reliable view of both strategies. There is research indicating dividend policies can be a useful indicator for accounting fraud, although this is has been disputed by some. External factors such as tax and exchange rates have been found to have an effect on dividend policies, though there is contrasting evidence as to the permanence of the effect.

The role of the shareholders has also been investigated, finding that shareholders will often be attracted to companies directly because of their policies and may possibly pull their investment should the policy change. Different theories have been applied and critiqued in this section of the report.

Research indicates that the decision on how best to distribute retained earnings is dependent on a number of variables and is not simply a case of whether to issue dividends or not. It explores different reasons for issuing dividends, as well as the applications/implications of a dividends issue.

2

CONTENTSExecutive Summary...........................................................................................................................................2

Introduction..........................................................................................................................................................4

Dividends Issue...................................................................................................................................................4

Valuation..........................................................................................................................................................4

Signalling.........................................................................................................................................................5

Fraud................................................................................................................................................................5

Reducing risk...................................................................................................................................................6

Re-Investment/Retention...................................................................................................................................6

Share Repurchases........................................................................................................................................7

Growth..............................................................................................................................................................8

Shareholder Attitudes.....................................................................................................................................9

External factors.................................................................................................................................................10

Influence of Tax.............................................................................................................................................10

Net Worth Covenant.....................................................................................................................................11

Exchange Rate Changes.............................................................................................................................12

Relevance and Reliability................................................................................................................................12

Conclusion.........................................................................................................................................................13

References........................................................................................................................................................15

3

INTRODUCTION The United Kingdom has a huge dividend market, accounting for 31% of global dividend income, which has seen growth of 60% in the five years from 2009. However, not all firms issue regular dividends, some never at all. With global dividend income growth rising to by 11% to $1.167 trillion (BBC News, 2015), this report will seek to investigate both the drawbacks and advantages of issuing dividends, and any other factors affecting this decision.

The recent economy has seen some major publicly listed companies go into liquidation, so sustainable growth is almost a necessity in the current market. Re-investment into the business versus dividends issues will be investigated throughout this report, summarising the key motivators and effects of both.

This report will investigate the factors affecting dividend policies, ranging from external contributing factors, to growth strategies and shareholder views. It will determine the cause and effect of some common applications dividend policies and how these are influenced by shareholders.

Many theories exist on dividend policies of companies and this report will seek to summarise the more prominent theories and analyse their importance and effect on the decision making process firm’s face when deciding policies.

Reliability of sources will analysed throughout this report, using contrasting views to create a balanced and fair argument, using reliable sources. There will also be a short section at the end summarising the relevance and reliability of the report as a whole.

DIVIDENDS ISSUE An issue of dividends is essentially a company’s way of distributing profits among its investors. The following sections will assess the applications and benefits of being a dividend issuing firm.

With dividend income ever increasing, it is important to note that DeAngelo and Skinner (2004) found that total dividends issued are heavily concentrated amongst the largest, most profitable firms. Clearly, profitability, size and performance are key characteristics in firms that pay dividends, not only in the United States, but internationally (Denis and Osobov 2008). So why are these firms more inclined to pay dividends than others?

VALUATION Before a lot of individuals or corporate bodies choose to invest, they will often calculate the value of the firm to assess how much their investment should be. One

4

method for company valuation is the Dividend Valuation Model (DVM). The higher the rate of dividends a firm issues, that great their valuation will be when calculated by the DVM, increasing the likelihood of investment from. The model works on the basis that the value of a share can be estimated as the present value of future payments, discounted back to shareholder returns.

Drake (2010) states that the DVM is useful when a company pays a constant and estimable dividend, which often is not the case for many companies. So if a company does not pay a dividend at all, then the DVM cannot be used to calculate its value, likewise, if they only rarely issue dividends or issue smaller dividends then their value will be negatively impacted and obscure.

However, Damodaran (2006) argues that the DVM can indeed be useful even when firms do not pay dividends, stating that a firm can still be valued based upon the expectation that it will eventually pay a dividend when the growth rate declines. Although Damodaran themselves note that these will still be undervalued using this model.

Finance Practitioner (2013) also notes that the DVM is open to deliberate manipulation via issuing dividends with the intention of increasing the valuation, compromising the usefulness of DVM over the long term.

United Utilities is a prime example of how dividend policy can impact company valuation. Their situation in 2009 meant that United Utilities had to decrease dividends and increase capital investment (The Guardian, 2010) with an anticipated 20-25% decrease in dividends to fund this investment. Share price in United Utilities dramatically decreased upon this announcement, showing a direct correlation between dividend policy and share price valuation.

SIGNALLING A dividends issue acts as a signalling tool to the market of success; generally dividends will reflect performance of a company. So an increased dividends issue will increase shareholders confidence that they have invested their money wisely and the company is doing well.

However, it may also signal that the firm has reached the height of its success is unable to grow any further, and so they are not re-investing for growth but distributing wealth among shareholders. A firm that is unable to sustain growth usually will not have long left on the market, so shareholders may seek to invest elsewhere, seeing a plummet in share prices and thus company valuation.

FRAUD Issuing dividends requires firms to report accounts more accurately and so it has been suggested that firms are less likely to issue dividends at a consistent rate if they are involved in fraudulent activities. DeFond (2010) therefore calls for increased

5

research into this, with policy experts calling for an increase in dividends on the idea that dividends force managers to report earnings more honestly, with the intention of decreasing fraudulent activities.

However, putting out the assumption that simply because a firm doesn’t pay dividends means they’re fraudulent is almost slanderous. Reading through the report, it is clear there’s a correlation between fraudulent companies and not paying dividends, but not necessarily vice versa, as there are many reasons a firm may choose not to issue a dividend.

This is further supported by Caskey and Hanlon (2005) who found that 43% of fraudulent firms will actually increase their dividends payments over the years, paying out in excess of $10.5 billion in dividends whilst involved in creative accounting. This contradicts DeFond (2010) by demonstrating that dividend payments and changes are not a wholly reliable indicator of fraud.

REDUCING RISK Often companies will have either an emphasis on dividends issue, or reinvestment, by being a company focussed on dividends there will be no investment risk associated with investment projects. This puts the company in a better position going forward as they have more capital and often a failed project will have more than just monetary drawbacks, but can also affect a company’s image and likelihood of future partnerships/investment.

Lee (2010) also stipulated that if after a dividends issue, a portion of the distributed equity is replaced by debt, shareholders would benefit due to the transfer of risk from equity holders to existing bondholders. However, this view is highly sceptical as many companies will not simply take out loans to mitigate the risks of their shareholders.

RE-INVESTMENT/RETENTION The decision to reinvest retained earnings rather than distributing them is mainly influenced by a firm’s growth and sustainability plans. Reinvestment of retained earnings will facilitate growth and expansion of the company, consequently increasing the value of shares and encouraging capital growth.

There are many theories and reasons that may explain why a firm decides to retain or re-invest their earnings, rather than distributing them among shareholders, some of which we will investigate below.

As with everything in the economy, businesses go through cycles, with performance and profitability seeing ups and downs over a certain time cycle. Sometimes the

6

economic downturns are worse than other, and it’s these times where the decision to retain earnings may save the business.

SHARE REPURCHASES A share repurchase or ‘buy-back’ is when a company either offers tender to current shareholders in exchange for their shares at a specific price and volume, or purchase shares in themselves directly through the stock market. Usually when a share repurchase is announced, share prices will dramatically increase as it is often interpreted as a signal from the company that their current performance is underrated by the stock market.

Share repurchases are not as common as dividends issues, with Skinner & Solte (2009) commenting that they represent less of a commitment than dividends. This isn’t unusual considering that share buy-backs are often huge announcements that dramatically increase valuations, as the company believe they are worth more than they’re currently being traded for – if they did this all the time, then the market would become less responsive to these repurchase announcements, making them pointless.

Such as the intentions of dividends are to distribute wealth among shareholders, you could also say that share repurchases do the same via share price appreciation.

Comment and Jarrell (1991) found that on the day of a buy-back announcement, return is positively correlated with the percent of outstanding shares repurchased. This demonstrates how shareholders interpret buy-back announcements and the positivity associated with them, hence the high percentage of repurchases made.

In terms of the firm’s motives for the repurchase, many firms often feel that the market has ‘undervalued’ their shares, and so this is their way of telling the market that they believe they are worth more. However, it could also be a long-term strategy to increase the returns of the company. Ikenberry et al. (1995) found that firms stating undervaluation as the reason for repurchases had abnormal returns of 45% in the four years following the announcement. Whether these abnormally positive returns are the cause of effect of the re-purchase announcement is unclear, although it is highly possible that a firm will publicly announce they feel they are undervalued in an effort to stimulate the market to increase their valuation.

Another possible reason for share repurchases is to improve their financial performance ratios, which many potential investors and lenders will assess before they take any action. When a firm repurchases its stocks, they are often then written off in the Statement of Financial Position, reducing the number of shares in issue, as well as decreasing the Cash assets by the cost of the repurchase.

By reducing assets, the Return on Assets (ROA) is improved, which will be perceived as an increase in efficiency of management to utilise their assets to generate returns. Likewise, the Return on Equity (ROE) ratio increases due to the fall

7

in ‘outstanding equity’, which measures the profit generated with shareholders’ funds. Both of these ratios will be appealing to potential investors, as ROE will tell new investors that their funds will be used effectively to generate profits, rather than sitting idle. Also, an increase in ROA emphasises a firm’s efficiency of using assets to generate income, which would appeal to potential lenders as they know the firm is likely to use funds effectively to generate returns.

Share Buy-Back announcements are also commonly accepted under the signalling theory, constituting a ‘revelation by management of favourable new information about the value of the firms future prospects’ (Kahle, 2001). Suggesting that shareholders and the general market will view an announcement as greatly encouraging, signalling a financially secure future for the firm, thus encouraging share prices to appreciate.

GROWTH Many start-up businesses will re-invest their retained earnings to meet their pre-determined growth forecast over a set amount of years. If they didn’t invest in growth then they would not reach their desired capacities in order to meet and exceed competition. This is especially prevalent in technology companies, requiring large amounts of capital for research and development.

Modigliani & Miller (1961) suggested that the ‘optimal use of funds’ was to invest in all projects with a positive net present value (NPV). By retaining earnings instead of issue dividends, a firm will be able to invest in many more potentially profitable projects.

Denis and Osobov (2008) also found that although large profitable firms will often make up the majority of dividend payments in a particular country, they found there were ‘disappearing dividends’ where dividends would sharply increase, then suddenly ‘disappear’. They were able to narrow this down to newly listed firms who aim to issue dividends rather than invest in sustainable growth, this initial surge is almost like a teething phase where the new firms issue a dividends because all the large companies are doing it, but quickly realise if they want to stay in the game they are going to need to start reinvesting back into the business to grow – then they can issue dividends.

Whilst it is agreed that retaining earnings incurs no additional costs to the company, an issue of dividends will negatively impact the capital budget due to flotation costs and other expenses (Lee, 2010) thus there are more available funds for investment in growth.

8

SHAREHOLDER ATTITUDES If a firm continuously retained earnings to reinvest in the future and never issue dividends, what kind of effect would this have on their shareholders?

The Bird in Hand theory suggests that shareholders want returns right now, increasing the pressure on firms to issue dividends in order to keep their shareholders from investing elsewhere. Baker, Powell and Veit (2002) explain the Bird-in-the-Hand theory by asserting that paying increased dividends will increase a firm’s value, because dividends are a “sure thing”, which is what attracts shareholders to dividend paying firms.

Although, in their report they also state that ‘no empirical’ evidence exists in support of the Bird-in-the-Hand theory – making the theory exactly that, a theory, with no empirical support or findings to back it up. The theory loses even more credibility as Bhattacharya (1979) finds that a dividends issue does not increase a firm’s value by signalling lesser risk, as risk is more accurately determined by the riskiness of future project cash flows. Thus the theory’s application as a valuation tool becomes obsolete, as dividend pay-outs are not an accurate determinant of risk, which is the basis of the theory and its valuation approach.

Though, Hussainey (2011) has said that despite the disadvantages noted in the Bird-in-Hand theory, managers will still go ahead to issue dividends as a method of sending a positive signal to shareholders regarding the firms future prospects, also supported by Lintner (1962) and Walter (1963).

Conversely, the Clientele Effect proposes that shareholders will initially invest in a company due to its dividend policy, so their loyalty will remain as long as the policy is maintained. Al-Malkawi (2007) grouped the clientele effect in two; those that favoured share price appreciation due to their high tax bracket, versus those that favoured regular dividend payments as they cannot afford the transaction costs involved with selling shares. Simplified, this categorisation puts high earning, high tax bracket investors in one group, and smaller investors who depend on dividend payments for their needs and so are adverse to the high transaction costs.

However, Modigliani & Miller (1961) maintained the premise that dividend policy is irrelevant even in this case, as they argued one clientele is as good as another, so if there is a change in policy, any loss of shareholders will be mitigated by new investors who are attracted to the new policy.

Whilst both are possible theories, Al-Malkawi was able to clearly distinguish two preferences among shareholders. Combining this with Modigliani & Miller, it could be assumed that although in the long-term dividend policy is irrelevant, in the short-term there will be fluctuations as shareholders react to a change in policy.

9

EXTERNAL FACTORS The decision on dividend policies is not simply an internal management decision, as there are many external factors that can affect how income is distributed.

INFLUENCE OF TAX There are different approaches to dividend taxation among countries, however the most common is the ‘double-taxation’ method; whereby the dividends are taxed at year end as retained earnings and then again under personal income tax when the dividends are received by the shareholders.

This system historically favoured by the United States of America (USA), with relatively high tax rates on dividends at the personal income level compared to other countries. However, they have sought to combat this on several occasions, most recently in their Jobs and Growth Tax Relief Reconciliation Act of 2003, lowering the individual tax rate on dividends to 15%, from its previous 38% tax rate.

However, Brav et al. (2008) challenges the role of personal tax rates on dividend initiation through their paper investigating the effects the 2003 tax cut. They found that tax rates are not an important factor for dividend decisions made by firms already paying dividends, or by firm’s initiation a dividend for the first time.

Their findings further supported the view that tax rates had a short-term effect on dividends, however in the long-run there was little impact on dividend issues. Miller and Scholes (1978, 1982) also support this finding, by asserting that the effects of tax cuts on dividends have not been convincingly demonstrated using long-run measures, only in the short-term.

Further, Brav et al. (2008) support their findings through an investigation conducted to seek the reason for new dividend initiations, with 63% of companies they surveyed confirming strong cash flows as the reason for initiating dividends, rather than tax rates. However, this information was gathered through press releases made by managers/directors and so cannot be wholly reliable, as the agency problem may occur and the true reasons behind dividend issues may not be made public, rather, reasons are given that will appeal to shareholders. This may explain why only 17% of companies confirmed tax rates as a deciding factor when determining dividend policies, as perhaps a company does not want to make public that they’re only doing something because it’s now ‘cheap’ but instead because they have good financial prospects and promising future cash flows.

In summary, Brav et al. (2008) came to the conclusion that the tax cut did not ‘create a whole new class of dividend-payers’ but rather encouraged some firms who were already ‘sitting on the fence’, and so the tax cut acts as more of a catalyst to push a firm to do something they may have done soon in the future anyway.

10

NET WORTH COVENANT It’s a fact that almost every business has to borrow funds or assets from a lender at some point and sometimes the lenders will implement something called a net worth covenant. This basically means that the company can default on their agreement if the net worth of the company drops below a certain point, whilst incurring enormous fees for doing so.

Jing Li (2008) states that debt covenants restrict firms from engaging in specific activities, such as issuing dividends or investing in new projects. Therefore a debt covenant will directly encourage a company to retain their earnings, rather than distribute them among shareholders or investment projects. As a consequence a company’s risk appetite is directly decreased, as there will be greater consequences of investments should they fall through, as they will lose out both on the value of the investment, and the value of the violation fee for the investment in the first place. This prohibiting of investments means firms may often lose out on potentially extremely profitable investments, both halting their growth and potential cash flows.

Even given their huge fines and vulnerable collateral, Smith (1993) found that there is a high frequency of violations and re-negotiations between firms and lenders. This suggests that the impact of covenant violations may often be overlooked as they can simply be renegotiated, especially if an attractive investment opportunity occurs.

DeFond and Jiambalvo (1994) also found that the majority of firms that violated their debt covenants had a going concern qualification in the year of violation. This can be interpreted as a firm doing all it can to ensure long term success; a covenant violation fine may be more appealing than missing out on a project with potentially massive returns, in the short-term they’ll incur a fine, but in the long term if the project pays off, they will have increased their overall net worth.

Going concern is good for neither the company nor the lender, so actions that get them out of that qualification, benefits both parties. Although a company may violate terms with a lender, if the lender then see’s that they have increased their net worth through investments, they will be more confident that the company is able to cover their debt, hence the frequent renegotiations.

However, the reliability of this study in decreased quite dramatically as they sought out firms specifically who had violated their covenants, creating a sample bias through their narrow selection. They noted themselves that violating firms may have not been selected in their study as they found a way to get away with it due to successful manipulations or ‘auditors actions’.

11

EXCHANGE RATE CHANGES Many larger companies will have operations across the globe and often these subsidiaries will trade in the currency local to their geography. This can be both an advantage and disadvantage to companies, as a slight change in in exchange rates can have a potentially huge impact on the profit when the group accounts are drawn up.

The effect of exchange rates can be used alongside hedging, should an investor’s portfolio include regular dividends from one denomination, they could choose to also have dividends coming from a currency that is negatively correlated, which should hedge against any large losses made dude to exchange rates. However, this will also hedge against large gains, as the weaker currency will weigh down the stronger one. Also, predicting future exchange rates and correlations is very risky, as there’s no guarantee or exact science for doing so.

Although, the Hunter (2014) said recently that ‘small fortunes’ can be made by those who are not just backing the right shares, but also the ‘winning currencies’. As an example, they note the 3% increase seen in the British based BP, an extremely popular share option, which rose purely because they declare their dividends in US Dollars, which had strengthened during the period.

A report by Dividend Tree (2010) found that 59% of investors experienced a loss or gain of at least 5% due to currency fluctuations, up 40% on the previous year.

However, leading stockbroker Killik & Co (2014) also state that over the long term, currencies have a ‘self-correcting mechanism’ meaning any benefits/drawbacks of currency fluctuations will likely be lost in the longer term, as the currency reaches its natural equilibrium.

Also, the time during question of Dividend Tree’s report was shortly after the recession, where the dollar was impacted greatly so should not be used to support the effect of every day fluctuations. With this in mind, it’s also important to note that the survey consisted of only 275 investors from a Pennsylvania-based research company, so sample size and location negatively affect the reliability of the report.

RELEVANCE AND RELIABILITY Throughout this report numerous literatures have been cited in support on a view or theory. I specifically aimed to gather information from academic sources to increase the reliability of the report.

However, the report also includes support from news sites such as BBC and the Telegraph, which use individual reporters to present their ‘opinion’ on a subject

12

matter. In these cases I have also tried to include additional supporting literature, so not to state an opinion as fact. This has been achieved by using academic articles/journals often written by established professors with specific strengths in their reporting topic.

In other circumstances, other factors have been taken into consideration, for instance; Dividend Tree’s report and it’s timing with regards to the financial collapse of 2008 along with its sample size and location.

Often, where one viewpoint was stated, it was either supported by additional literature, or conversely contradicted by literature of a different viewpoint. This ensured a fuller, less bias report.

CONCLUSION

This report has sought to investigate the underlying motivators for the differing dividend policies among various firms. Dividend issues versus re-investment frequently came down to short-run versus long run targets. A fresh start-up business will re-invest in order to achieve long term goals, whereas an established business may issue dividends as a form of shareholder retention.

Many times companies have outside influences that determine their dividend policies, the report found that in the case of debt covenants and exchange rates, most external factors are only short-term and will often ‘self-correct’ in the long run.

Companies that have fewer costs and more consistent incomes will generally have a consistent annual dividend policy, as seen in the majority of utility companies, with already hugely established operations they have little need for expansion or research and development and so can distribute this as dividends. Conversely, companies with great intentions for expansions and developments such as tech companies often do not issue dividends, simply because the capital is better invested back into the business.

However, as Denis and Osobov (2008) observed, newly listed firms will often stop issuing dividends as soon as they started, leaving the lion share of dividend issues to larger more profitable companies. Thus supporting the theory that once a business must first invest in itself to grow, until it reaches a certain performance level and growth begins to slow, it will then begin to distribute its earnings to shareholders, rather than to itself.

There are many external factors that impact the decision on dividend policies, which no matter how large the company, cannot be altered. With regards to shareholders

13

then, I believe it is most financially beneficial to them to hedge their investments in order to mitigate these external factors.

With this in mind it is clear that there is no right or wrong answer with regards to distributing retained earnings, every company has its own strategies and targets, which will greatly impact on whether they choose to issue dividends or reinvest in the business.

Throughout my research I can conclude that that whether a firm decides to issue frequent dividends, or re-invest their retained earnings, the shareholder will gain value, through either the monetary value of the dividends, or the share appreciation gained from the re-investment – which is the ultimate aim of both policies.

14

REFERENCES

1. Baker, H., Powell, G. and Veit, E. (2002). Revisiting the dividend puzzle. Review of Financial Economics, 11(4), pp.241-261.

2. BBC News, (2015). Global dividend income reaches record. [online] Available at: http://www.bbc.co.uk/news/business-31485930 [Accessed 1 Mar. 2015].

3. Bhattacharya, S. (1979). Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy. The Bell Journal of Economics, 10(1), p.259.

4. Brav, A., Graham, J., Harvey, C. and Michaely, R. (2008). Managerial Response to the May 2003 Dividend Tax Cut. Financial Management, 37(4), pp.611-624.

5. Caskey, J. and Hanlon, M. (2012). Dividend Policy at Firms Accused of Accounting Fraud. Contemporary Accounting Research, 30(2), pp.818-850.

6. Comment, R. and Jarrell, G. (1991). The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases. The Journal of Finance, 46(4), p.1243.

7. Damodaran, A. (2006). Damodaran on valuation. Hoboken, N.J.: John Wiley & Sons.

8. DeAngelo, H., DeAngelo, L. and Skinner, D. (2004). Are dividends disappearing? Dividend concentration and the consolidation of earnings. Journal of Financial Economics, 72(3), pp.425-456.

9. DeFond, M. (2010). Earnings quality research: Advances, challenges and future research. Journal of Accounting and Economics, 50(2-3), pp.402-409.

10.DeFond, M. and Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1-2), pp.145-176.

11.Denis, D. and Osobov, I. (2008). Why do firms pay dividends? International evidence on the determinants of dividend policy☆. Journal of Financial Economics, 89(1), pp.62-82.

12.Dividendtree.net, (2015). Effect of Currency Fluctuations on US Dividend Investors? | Dividend Tree. [online] Available at: http://www.dividendtree.net/commentary/effect-of-currency-fluctuations-on-us-dividend-investors/ [Accessed 2 Mar. 2015].

15

13.Financepractitioner.com, (2015). Dividend Discount Model - Definition of Dividend Discount Model - QFINANCE. [online] Available at: http://www.financepractitioner.com/dictionary/dividend-discount-model [Accessed 1 Mar. 2015].

14.Gerardi, G., Graetz, M. and Rosen, H. (1990). Corporate Integration Puzzles. National Tax Journals, 43(3), pp.307-14.

15.Hunter, T. (2014). How foreign currencies affect your investment returns - Telegraph. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11245875/How-foreign-currencies-affect-investment-returns-and-the-funds-to-back.html [Accessed 1 Mar. 2015].

16.Hussainey, K., Oscar Mgbame, C. and ChijokeMgbame, A. (2011). Dividend �policy and share price volatility: UK evidence. The Journal of Risk Finance, 12(1), pp.57-68.

17. Ikenberry, D., Lakonishok, J. and Vermaelen, T. (1995). Market underreaction to open market share repurchases. Journal of Financial Economics, 39(2-3), pp.181-208.

18. Ikenberry, D., Vermaelen, T., (1996) The option to repurchase stock. Financial Management 25, 9–24.

19.Kahle, K. When a Buyback Isn't a Buyback: Open Market Repurchases and Employee Options. SSRN Journal.

20.Killik & Co, (2015). Killik Currency Service - Competitive Exchange Rates - Killik & Co. [online] Available at: https://www.killik.com/services-and-products/killik-currency-service/ [Accessed 12 Feb. 2015].

21.Lee, C., Lee, A. and Lee, J. (2010). Handbook of quantitative finance and risk management. New York: Springer.

22.LI, J. (2012). Accounting Conservatism and Debt Contracts: Efficient Liquidation and Covenant Renegotiation*. Contemporary Accounting Research, p.no-no.

23.Lintner, J. (1962). Dividends, Earnings, Leverage, Stock Prices and the Supply of Capital to Corporations. The Review of Economics and Statistics, 44(3), p.243.

24.Miller, M. and Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. J BUS, 34(4), p.411.

16

25.Miller, M. and Scholes, M. (1978). Dividends and taxes. Journal of Financial Economics, 6(4), pp.333-364.

26.Miller, M. and Scholes, M. (1982). Dividends and Taxes: Some Empirical Evidence. Journal of Political Economy, 90(6), p.1118.

27.Neale, F., Drake, P. and Clark, S. (2010). Diversification in the Financial Services Industry: The Effect of the Financial Modernization Act. The B.E. Journal of Economic Analysis & Policy, 10(1).

28.Nizar AlaeMalkawi, H. (2007). Determinants of Corporate Dividend Policy in �Jordan: An Application of the Tobit Model. Journal of Economic and Administrative Sciences, 23(2), pp.44-70.

29.Skinner, D. and Soltes, E. (2009). What do dividends tell us about earnings quality?. Rev Account Stud, 16(1), pp.1-28.

30.Smith, C. W. 1993. A perspective on accounting-based debt covenant violations. The Accounting Review 68 (2): 289–303.

31.Smith, C. W., and J. B. Warner. 1979. On financial contracting: An analysis of bond covenants. Journal of Financial Economics 7 (2): 117–61.

32.The Guardian, (2015). United Utilities | Business | The Guardian. [online] Available at: http://www.theguardian.com/business/unitedutilities [Accessed 1 Mar. 2015].

33.Walter, J. (1963). DIVIDEND POLICY: IT’S INFLUENCE ON THE VALUE OF THE ENTERPRISE. The Journal of Finance, 18(2), pp.280-291.

17