Joe Ann Hudson
April 20, 2013
Doing my research, I found some dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: either it can be re-invested in the business, or it can be paid to the shareholders as a dividend.
Dividend policy has been an issue of interest in financial literature since Joint Stock Companies came into existence. Dividends are defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders over time.
Management’s primary goal is to the shareholder’s wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. theory put forth by Miller and Modigliani that, in a perfect world, the value of a firm is unaffected by the distribution of dividends and is determined solely by the earning power and risk of its assets.
Dividend relevance theory, that current dividend payments reduce investor uncertainty and ultimately result in a higher value for the firm’s shares.
In perfect capital markets, in the absence of taxes and transaction costs, dividend policy is irrelevant in the sense that it cannot affect shareholder value. The effect of any dividend policy can be offset by management adjusting the sale of new stock or by investors adjusting their dividend stream through stock purchases or sales.
“Myron J. Gordon and John Lintner proposed this theory. Dividend relevance theory suggests that investors are generally risk averse and
References: Adams, P.D., Wyatt, S. B., Walker, M.C. (2007). Dividends, Dividend Policy and Option Valuation: A New Perspective. Journal of Business Finance and Accounting, Vol 21, No 7, September Anand Manoj(2001), “Factors influencing dividend policy decisions of Corporate India”, ICFAI Journal of Applied Finance, 2004 Vol. X,No.2 Baker, H.K. (1999) “Dividend Policy issues in regulate and unregulated firms: a managerial prerspective”, Managerial Finance, Vol. 25, No. 6, pp. 1-19 Frankfuter, M, George and Wood Bob, G (2003). Dividend Policy Theory and Practice” Academic Press Miller, M. and Modigiliani, F. (1961), Dividend policy, growth, and the valuation of shares. Journal of Business, 34, 411-433