Does a dividend policy matter?
INTRODUCTION
That report is a detailed review of dividend policy and whether or not could affect the market value of the company. When companies make profits, managers have to decide either to reinvest those profits for the good of company or either they could pay out the owners (shareholders) of the firm in dividends. Once they decide to pay dividends they may possibly establish a permanent dividend policy, which is the set of guidelines a company uses in order to decide how much of its profits it will pay out to shareholders in dividends and that decision depends on the preferences of existing and new investors and the situation of the company now and in the future (Garrison, 1999). There are various limitations that may affect firm’s decision and must consider when paying dividends to shareholders such as Legal Limitations where added net realised profits is the only way to pay dividends, Liquidity where managers has to consider the effect that future dividend payments may have on liquidity, Interest Payment obligations where if the gearing (level of debt) is high then the available funds for dividends should be reduced and Investment Opportunities where a company could invest in attractive projects rather than to pay more dividends (Watson and Head, 2007).
There are two theories related to dividend, the Irrelevance Theory suggested that dividend policy it is not relevant to security valuation and the Relevance Theory, suggested that it is relevant and affect the value (Bar-Yosef and Kolodny, 1976). Below will see those theories.
IRRELEVANCE THEORY Modigliani & Miller (1961) through the Irrelevance Theory stated that share value depends on corporate earnings, which reflect the investment policy of the company, depends only on investment decisions and it is independent of the level of dividend paid. First of all that theory assume that capital markets are perfect, there are no transactions costs associated with converting shares into cash by selling them and
That report is a detailed review of dividend policy and whether or not could affect the market value of the company. When companies make profits, managers have to decide either to reinvest those profits for the good of company or either they could pay out the owners (shareholders) of the firm in dividends. Once they decide to pay dividends they may possibly establish a permanent dividend policy, which is the set of guidelines a company uses in order to decide how much of its profits it will pay out to shareholders in dividends and that decision depends on the preferences of existing and new investors and the situation of the company now and in the future (Garrison, 1999). There are various limitations that may affect firm’s decision and must consider when paying dividends to shareholders such as Legal Limitations where added net realised profits is the only way to pay dividends, Liquidity where managers has to consider the effect that future dividend payments may have on liquidity, Interest Payment obligations where if the gearing (level of debt) is high then the available funds for dividends should be reduced and Investment Opportunities where a company could invest in attractive projects rather than to pay more dividends (Watson and Head, 2007).
There are two theories related to dividend, the Irrelevance Theory suggested that dividend policy it is not relevant to security valuation and the Relevance Theory, suggested that it is relevant and affect the value (Bar-Yosef and Kolodny, 1976). Below will see those theories.
IRRELEVANCE THEORY Modigliani & Miller (1961) through the Irrelevance Theory stated that share value depends on corporate earnings, which reflect the investment policy of the company, depends only on investment decisions and it is independent of the level of dividend paid. First of all that theory assume that capital markets are perfect, there are no transactions costs associated with converting shares into cash by selling them and