Dividend policy is the policy a company uses to structure its dividend payout to shareholders
Question Three
Dividend policy is the policy a company uses to structure its dividend payout to shareholders. Since the publication of the dividend irrelevance hypothesis of Miller and Modigliani (1961), a large body of theoretical and empirical research on dividend policy has been produced. Research and critically discuss the results of empirical studies on the dividend policy.
Hint
Accounting & FinanceModigliani – Miller theory is a major proponent of ‘Dividend Irrelevance’ notion and according to it, dividends are irrelevant in calculating the valuation of a company and investors do not pay any importance to the dividend history of a company. The theory is in direct contrast to the Dividend Relevance (according to which dividends are important in the valuation of a comp...
Modigliani – Miller theory is a major proponent of ‘Dividend Irrelevance’ notion and according to it, dividends are irrelevant in calculating the valuation of a company and investors do not pay any importance to the dividend history of a company. The theory is in direct contrast to the Dividend Relevance (according to which dividends are important in the valuation of a company). Also, according to this theory, dividends are irrelevant by the arbitrage argument,so the dividends distribution to shareholders is offset by the external financing and, due to this distribution of dividends the price of the stock decreases and would nullify the gain made by the investors because of the it. This study reviewed the existing theories on dividend policy and their empirical findings and from that, it could be established that dividend policy theories have divergent relevance between management and the shareholders arising from opposing interests. And, here the management is primarily focused on the objective growth of the organization while the shareholders are focused on the shareholders wealth in terms of share price that determine their return on investment. The study also showed a positive relationship between firm value and dividends payout.
Login | Sign Up
