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As Jensenp. How do we want them to determine what is better versus worse? Most economists would answer simply that managers have a criterion for evaluating performance and deciding between alternative courses of action, and that the criterion should be maximization of the long-term market value of the firm. This Value Maximization proposition has its roots in years of research in economics and finance. The decisions of corporate financial managers fall into two broad categories: investment decisions and financing decisions Baker and Powell, Investment decisions involve determining the type and amount of assets that the firm wants to hold, reflected on the left-hand side of its balance sheet.
Dividend policy refers to the payout policy that a firm follows in determining the size and pattern of cash distributions to shareholders over time. Under real-world conditions, determining an appropriate payout policy of- ten involves a difficult choice because of the need to balance many potentially conflicting forces. Because investment, financing, and dividend decisions are inter- related Pruitt and Gitman,management cannot consider dividend policy in isolation from these other decisions.
In practice, many corporate managers carefully consider the choice of dividend policy because they believe such decisions affect firm value and hence shareholder wealth Baker, Farrelly, and Edelman, ; Baker and Powell, In addition, many investors view dividend policy as important because they supply cash to firms with the expectation of eventually receiving cash in return.
Yet much academic debate surrounds the role, if any, of how dividend decisions lead to achieving the goal of value maximization. For example, in writing his influential but underappreciated classic, The Theory of Investment Value, John Burr Williams was among the first economists to view stock prices as determined by intrinsic value and to articulate the theory of dividend-based valuation.
According to Williams, a stock is worth only what you get out of it. Thus, the intrinsic value, or long-term worth, of a common stock is the present value of its future net cash flows in the form of dividend distributions and selling price.
Graham and Dodd also believe that stock prices reflect an intrinsic value related to dividends and earnings. In their pioneering study, Miller and Modigliani hereafter MM provide an elegant analysis of the relationships among dividend policy, growth, and the valuation of shares, dividend policy literature review.
On the basis of a well-defined but simplified set of perfect capital market assumptions e. In their idealized world, investment policy is the sole determinant of firm value. Therefore, if managers focus on making prudent investment choices, payout policy and capital structure should take care of themselves.
Early studies by Black and ScholesMillerand Miller and Scholessupport the dividend irrelevance argument. In addition, stockholders are indifferent to receiving a given amount of cash as a dividend or through stock repurchases. Yet DeAngelo and DeAngelo contend that the set of possible payout policies is not as limited as MM assume and that payout policy matters.
As Bernstein p. For instance, some early theories that explain the potential relevance of dividends involve taxes, agency costs, and asymmetric information. Lease, John, Kalay, Loewenstein, and Sarigp. Lease et al. In fact, Lease et al. develop a dividend policy literature review life cycle incorporating market frictions to illustrate how dividend policy differs according to the phase of that cycle: start-up, initial public offering IPOdividend policy literature review, rapid growth, maturity, dividend policy literature review, and decline.
In a much-cited article, Blackp. In fact, the surge of dividend research after MM led Angp. Empirical tests of these theories often result in conflicting results.
In a controversial paper, DeAngelo and DeAngelo claim that, contrary to MMpayout policy is not irrelevant and that investment policy is not the sole determinant of value, even in frictionless markets. Such attempts reflect varying degrees of success and failure. The book concentrates mainly on dividends and share repurchases because they are the principal mechanisms by which corporations distribute cash to share- holders.
Although most chapters deal with these distribution methods, others cover such dividend-related topics as dividend reinvestment plans, stock splits and stock dividends, and corporate governance. Dividend policy literature review much dividend research centers on North American financial markets, the book also examines dividend studies from around the world. Understand- ing the evolution and trends of dividend policy provides insights into dividend decisions, as does the identification of factors influencing dividends, dividend policy literature review.
Chapter 2: The Historical Evolution of Dividends Chapter 2 summarizes the evolution of dividend policy from the sixteenth century to modern times. The first corporations were short-term ventures that ended in full liquidation.
As corporations became longer lived, managers faced the issue of how to dividend policy literature review distributions to shareholders, and numerous firm-specific policies as well as laws developed to address how much corporations could pay shareholders. From the seventeenth to the nineteenth century, managers used dividends to influ- ence share prices and to attract new capital.
In the twentieth century, researchers developed various hypotheses to explain dividend policies. An overview of recent surveys and observed firm reactions to changes in tax laws provide additional insights into current dividend policies. Chapter 3: Trends in Dividends: Payers and Payouts Chapter 3 reviews recent trends in dividends and dividend payers and focuses on the phenomenon of disappearing dividends, which appeared in the United States during the end of the twentieth century, as first observed by Fama and French Researchers have advanced several possible explanations for the decrease in the propensity to pay dividends.
To date, there is no universally ac- cepted explanation. Finally, although studies on countries other than the United States have observed a similar decline in the propensity to pay dividends, the magnitude of the phenomenon is much less pronounced and much more recent. Chapter 4: Factors Influencing Dividends Chapter 4 synthesizes the academic evidence on the cross-sectional and time-series determinants of dividends. This evidence shows that dividends are associated with several firm characteristics, such as size, profitability, dividend policy literature review, growth opportunities, ma- turity, leverage, equity ownership, and incentive compensation.
The chapter also examines the relationship between dividends and characteristics of dividend policy literature review market in which the firm operates, such as tax law, dividend policy literature review, investor protection, product market com- petition, investor sentiment, and public or private status, as well as the availability of substitute forms of corporate payout, primarily repurchases.
These findings have several implications for existing theories of dividend policy and suggest avenues for future research. Chapter 5: Cross-Country Determinants of Payout Policy: European Firms Most research in dividend policy focuses on the North American financial mar- kets and their associated regulatory environment. Chapter 5 focuses on dividend policies of European firms and other legal and regulatory regimes. It begins by examining the evolution of dividend policy to determine whether the key trends identified in the United States, such as the declining fraction of dividend payers and the concentration of dividend payers among large firms, also occur in Europe.
The chapter then examines the major determinants of European payout policy, drawing largely from Bancel, Bhattacharyya, and Mittoo The chapter pro- vides some reassuring evidence that the major factors influencing dividend policy are similar across countries. At the heart of the dividend puz- zle is whether dividend policy affects share prices.
Some believe that payout policy is irrelevant because they contend that only investment policy affects value. Thus, one dividend policy is as good as any other. Others support dividend relevance, in which case dividend policy affects value.
Although dividend policies may take many forms, two generic classifications are a residual dividend policy and a managed dividend policy. This passive ap- proach assumes that investors prefer that firms keep and reinvest earnings. A managed dividend policy is one in which management attempts to achieve a specific pattern of dividend payments. According to certain MM assumptions, a managed dividend policy is irrelevant because such a policy would not increase shareholder wealth.
Thus, dividend policy literature review, corporate managers who believe that dividend policy is relevant would engage in some type of managed dividend policy. Chapter 6: Dividend Irrelevance Theory In their pioneering work, MM show that, under certain assumptions, divi- dends are irrelevant to total firm value. Their work represents a radical departure from previous views of dividend policy and is one of the first to use analytically dividend policy literature review techniques to address a finance issue.
In addition, the influence of divi- dend irrelevance theory on finance research has been profound. Researchers have attempted to find reasons that dividends exist, and the focus has usually been either on market frictions, dividend policy literature review as taxes, transaction costs, and imperfect infor- mation, or on behavioral considerations, such as investor preferences. Chapter 7: Residual Dividend Policy The concept of a residual dividend policy has deep roots in the financial literature and underlies important theoretical work.
Among the recommendations of agency theory is a residual dividend policy specifying that managers pay shareholders the free cash flows remaining after funding all profitable investments.
Empirical evidence suggests that firms generally do not follow this type of policy. Instead, firms generally maintain a smoothed dividend sequence that is as strongly related to past dividends as it is to current earnings. In addition, firms build up cash balances to fund dividend policy literature review investments.
When a funding shortage occurs, firms often use short-term borrowing rather than cut the dividend, dividend policy literature review. Chapter 8: Taxes and Clientele Effects According to tax preference theory, rational investors prefer that firms retain cash instead of paying dividends when tax rates are higher on dividends than on long- term capital gains.
Thus, firms should keep dividend payments low if they want to maximize share price. Dividend policy literature review of this theory also contend that investors in high tax brackets prefer stocks with low dividend yields while investors in low brackets prefer stocks with high dividend yields. These situations represent clientele effects. Studies often use variations in the tax rates on dividend income and capital gains to examine the effects of taxation on dividend policy.
According to the free cash flow model, dividend policy literature review market reacts positively negatively to the news of dividend increases decreases because the potential for managers to misuse excess funds decreases increases. This model implies that the market reaction to dividend-change announcements is greater for firms with higher overinvestment potential than for those with lower overinvest- ment potential. Empirical evidence typically supports this hypothesis.
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We are living in the digital age, when people Dividend Policy Literature Review completely depend on written information: texting, messaging, media posts - if something is not written online, it’s like it does not exist. However used to writing modern-day people might be, the Dividend Policy Literature Review necessity to write a full-fledged letter switches their stress mode on This paper examines the determinants of corporate dividend policy in Jordan. The study uses a firm-level panel data set of all publicly traded firms on the Amman Stock Exchange between and The study develops eight research hypotheses, which are used to represent the main theories of corporate dividends. A general-to-specific modeling approach is used to choose I. Literature Review Over the past several decades, researchers have directed much attention toward identifying the determinants of corporate dividend policy. Finance scholars have engaged in extensive theorizing about factors that may be important in determining a firm’s dividend policy. For example, some of these theories
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