Dividend Theories and Their Arguments

19045 Words May 17th, 2012 77 Pages
International Bulletin of Business Administration ISSN: 1451-243X Issue 9 (2010) © EuroJournals, Inc. 2010 http://www.eurojournals.com

Dividend Policy: A Review of Theories and Empirical Evidence
Husam-Aldin Nizar Al-Malkawi Corresponding Author, Faculty of Business, ALHOSN University P.O. Box 38772 - Abu Dhabi, UAE E-mail: h.almalkawi@alhosnu.ae Michael Rafferty Senior Research Analyst, WRC, University of Sydney, Australia E-mail: m.rafferty@econ.usyd.edu.au Rekha Pillai Faculty of Business, ALHOSN University, Abu Dhabi, UAE E-mail: r.pillai@alhosnu.ae Abstract The literature on dividend policy has produced a large body of theoretical and empirical research, especially following the publication of the dividend irrelevance hypothesis
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The enduring nature and extensive range of the debate about dividend policy has spawned a vast amount of literature that grows by the day. For this reason, a full review of all debates is not feasible1. However, this paper endeavours to give justice to the importance of both the topic of dividend policy as an area of financial economic research, and also to the literature that has been produced addressing that topic, by reviewing the most important and influential studies in this area. It attempts to outline the main theories and explanations of dividend policies and to review the main empirical studies on corporate dividend policy. The remaining of this paper is organized as follows. Section 2 gives a short background of corporate dividend policy. Section 3 analyses the theories of dividend policy starting with the dividend irrelevance hypothesis of Miller and Modigliani, and then the alternative hypotheses including bird-inthe-hand, tax-preference, clientele effects, signalling, and agency costs hypotheses. Section 4 summarises the paper.

2. Background of Corporate Dividend Policy2
The issue of corporate dividends has a long history and, as Frankfurter and Wood (1997) observed, is bound up with the development of the corporate form itself. Corporate dividends date back at least to the early sixteenth century in Holland and Great Britain when the captains of sixteenth century sailing ships started selling financial claims to investors, which