Why Firms Pay Dividends Essay

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

Philip H. Siegel, Augusta State University, USA David P. Franz, San Francisco State University, USA John O’Shaughnessy, San Francisco State University, USA

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

c. We need an exogenous shock to dividend tax rate in order to test how dividend taxation affect divided policy. I will use the 2003 Dividend cut. There are many factors for dividend vs repurchase. In addition to dividend tax, Roni also talked about the signaling role of payout policy, agency problem related to payout policy and behavioral biases related to divided vs, repurchase. Therefore, it is not clear now tax affected divided policy. An exogenous shock to dividend tax rate isolates the effect of tax on payout policy. We assume that dividend tax cut does not change other factors such firm’s agency problem or investor’s

Authors and their Affiliations: Jessica A. Jones, Kelvin O. Lim, Jeffrey R. Wozniak, Sheila Specker, and Angus W. MacDonald, III. University of Minnesota.

The need for clarification on the board requirements for a majority of independent directors as it relates to corporate governance is of great importance and would be discussed in this write up.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

Note: Objective 2A will be submitted as a preproposal to Purdue/Showalter Trust grant on September 2015.

Authors: Quentin McCorvey, Scott McCartney, Craig Mathews, and Ross Mather. T.A. Maia Popova, Professor Yasmin Jessa. 144 Section C. October 15, 2014.

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash.

A dividend is a usually distributed in cash form to stock holders of a corporation approved by the board of director. It may also include stock dividend or other forms of payment. A stock dividend represents a distribution of additional shares to common stockholders. Dividends are only cash payments regularly made by corporations to their stockholders.

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first

Kumar (1988) builds a model that explains dividend smoothing - one of the most salient features of dividend policy. Dividends once again signal a firm’s quality (productivity), but, since they are over invested in the firm, managers will try to under invest by underreporting a firms productivity. While there is no fully revealing equilibrium, Kumar shows that firms will tend to cluster around optimal dividend levels. Agency theory suggests that dividends can be used as a means to control a firm’s management. Distributing dividends reduces the free cash