Dividend Relevance
How accurate is the statement that “The dividend policy of a firm is irrelevant”.
By
Mr. George Ekegey Ekeha
(MBA – Finance, MBA & BCom)
(Lecturer in Corporate Finance & International Finance @ Regent University College of Science & Technology)
Email: ekegey24ge@yahoo.co.uk
March 2009
THIS PAPER IS PREPARED IN RESPONSE TO A RELEVANT QUESTION TO HELP STUDENTS TAKING CORPORATE FINANCE COURSE.
No Part of This Thesis Is To Be Used For Any Purposes, Other Than Academic REFERENCE, Without The Official Consultation With The Author.
TABLE OF CONTENT
1.0 EXECUTIVE SUMMARY 2
2.0 DIVIDEND POLICY 3
2.1 DIVIDENDS PAYMENTS 3 2.2.0 FACTORS AFFECTING DIVIDEND POLICY 5 2.2.1 LEGAL RESTRAINTS 5 2.2.2 SHAREHOLDERS EXPECTATIONS 5 2.2.3 TAXATION 6 2.2.4 CASH-FLOW UNCERTAINTY 7
3.0 DIVIDEND POLICY RELEVANCY 8
3.1.0 EXPLANATIONS OF DIVIDEND RELEVANCE 8 3.1.1 THE BIRD-IN-THE-HAND EXPLANATION 8 3.1.2 THE SIGNALLING EXPLANATION 9 3.1.3 THE TAX-PREFERENCE EXPLANATION 10 3.1.4 THE AGENCY EXPLANATION 10 3.2.0 INDUSTRY INFLUENCE ON DIVIDEND POLICY 11
4.0 THE CLIENTELE EFFECT. 12
5.0 CONCLUSION 14
APPENDIX I: CORPORATE FINANCE ASSIGNMENT 16
APPENDIX II: REFERENCES 17
1.0 EXECUTIVE SUMMARY
Various studies suggest that the question of whether dividend policy affects the value of the firm has puzzled researchers and corporate managers for many years. It is evidence that dividend policy is one of the most widely researched topics in finance. Yet, researchers have different views about whether the percentage of earnings that a firm pays out in dividends materially affects its long-term share price, Dempsey et al, (1993).
This essay tried to identify the various studies on the dividend puzzle. It is outlined in this essay that dividend payment by corporate organisations is influenced by various factors. Some of the factors discussed here include legal restrains, shareholders’ expectations,
By
Mr. George Ekegey Ekeha
(MBA – Finance, MBA & BCom)
(Lecturer in Corporate Finance & International Finance @ Regent University College of Science & Technology)
Email: ekegey24ge@yahoo.co.uk
March 2009
THIS PAPER IS PREPARED IN RESPONSE TO A RELEVANT QUESTION TO HELP STUDENTS TAKING CORPORATE FINANCE COURSE.
No Part of This Thesis Is To Be Used For Any Purposes, Other Than Academic REFERENCE, Without The Official Consultation With The Author.
TABLE OF CONTENT
1.0 EXECUTIVE SUMMARY 2
2.0 DIVIDEND POLICY 3
2.1 DIVIDENDS PAYMENTS 3 2.2.0 FACTORS AFFECTING DIVIDEND POLICY 5 2.2.1 LEGAL RESTRAINTS 5 2.2.2 SHAREHOLDERS EXPECTATIONS 5 2.2.3 TAXATION 6 2.2.4 CASH-FLOW UNCERTAINTY 7
3.0 DIVIDEND POLICY RELEVANCY 8
3.1.0 EXPLANATIONS OF DIVIDEND RELEVANCE 8 3.1.1 THE BIRD-IN-THE-HAND EXPLANATION 8 3.1.2 THE SIGNALLING EXPLANATION 9 3.1.3 THE TAX-PREFERENCE EXPLANATION 10 3.1.4 THE AGENCY EXPLANATION 10 3.2.0 INDUSTRY INFLUENCE ON DIVIDEND POLICY 11
4.0 THE CLIENTELE EFFECT. 12
5.0 CONCLUSION 14
APPENDIX I: CORPORATE FINANCE ASSIGNMENT 16
APPENDIX II: REFERENCES 17
1.0 EXECUTIVE SUMMARY
Various studies suggest that the question of whether dividend policy affects the value of the firm has puzzled researchers and corporate managers for many years. It is evidence that dividend policy is one of the most widely researched topics in finance. Yet, researchers have different views about whether the percentage of earnings that a firm pays out in dividends materially affects its long-term share price, Dempsey et al, (1993).
This essay tried to identify the various studies on the dividend puzzle. It is outlined in this essay that dividend payment by corporate organisations is influenced by various factors. Some of the factors discussed here include legal restrains, shareholders’ expectations,
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