Impact of Tax Consideration and Transitory Earnings on Dividend Inside a Firm.
IMPACT OF TAX CONSIDERATION AND TRANSITORY EARNINGS ON DIVIDEND INSIDE A FIRM.
By
ADARAMOLA A. O. (Ph.D.)
ABSTRACT
The purpose of this paper is to discuss the Dividend Relevance Theory and to determine whether a relationship exists between dividend payment and transitory earnings; given the impact of tax and other economic conditions with the objective of maximizing the present discounted value of after tax dividend. To achieve this, the Lintner’s models were specified to which the OLS regression was used to estimate the impact of dividend payment on short term transitory earnings. A total of fifty (50) quoted Nigerian firms were examined and the result shows that a relationship exists between dividend payment and transitory earnings; given the effect of tax and other economic conditions.
INTRODUCTION
Dividend relevance is a theory relating to the impact of dividends on organizations and individual investors. The theory advanced by Gordon and Linter, establishes that there is a direct relationship between a firms dividend policy and its market value. Investors respond to receiving actual cash returns. Gordon and Linter referred to this as the “Bird in hand theory”- another name for dividend relevance (de Boyrie, 2001). According to the Hewitt Investment Group. “Gordon and Linter asserts that dividends received today are preferable to future dividends, which are subject to uncertainty. Higher uncertainty will cause investors to ascribe a higher risk premium to those payments, thereby increasing a firms cost of capital (Hewitt, 2002).
The essential element of the dividend relevance theory is the fundamental teaching that investors find current dividends less risky than future returns and will invest more, boosting stock prices. Gordon and Linter believe stockholders prefer current dividend and that this causes a positive relationship between dividend and market value.
2.1 LINTNER’S DIVIDEND MODEL
The Lintner model of dividend
By
ADARAMOLA A. O. (Ph.D.)
ABSTRACT
The purpose of this paper is to discuss the Dividend Relevance Theory and to determine whether a relationship exists between dividend payment and transitory earnings; given the impact of tax and other economic conditions with the objective of maximizing the present discounted value of after tax dividend. To achieve this, the Lintner’s models were specified to which the OLS regression was used to estimate the impact of dividend payment on short term transitory earnings. A total of fifty (50) quoted Nigerian firms were examined and the result shows that a relationship exists between dividend payment and transitory earnings; given the effect of tax and other economic conditions.
INTRODUCTION
Dividend relevance is a theory relating to the impact of dividends on organizations and individual investors. The theory advanced by Gordon and Linter, establishes that there is a direct relationship between a firms dividend policy and its market value. Investors respond to receiving actual cash returns. Gordon and Linter referred to this as the “Bird in hand theory”- another name for dividend relevance (de Boyrie, 2001). According to the Hewitt Investment Group. “Gordon and Linter asserts that dividends received today are preferable to future dividends, which are subject to uncertainty. Higher uncertainty will cause investors to ascribe a higher risk premium to those payments, thereby increasing a firms cost of capital (Hewitt, 2002).
The essential element of the dividend relevance theory is the fundamental teaching that investors find current dividends less risky than future returns and will invest more, boosting stock prices. Gordon and Linter believe stockholders prefer current dividend and that this causes a positive relationship between dividend and market value.
2.1 LINTNER’S DIVIDEND MODEL
The Lintner model of dividend