Dividend Policy Firm's Dividend Policy Term Paper

  • Length: 6 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #62082716

Excerpt from Term Paper :

It carries the balanced and effective cash flow in a long-term period and fosters the value of a firm. The crux is to render firms more adaptable to future changes of environments and realize value creation and continuous growth. Since value creation happens to be the initial stage of value management, therefore the main feature of a dividend policy founded on value management and rising it to realize the maximum of a firm's value, and foster enterprise's long-term development while considering the dividend policy. However dividend policy based on value management concentrates on the firm's long-term sustainable development, but does not give attention to the firm's short-term state increasingly. (Wang, 2006)

Discussion of stock valuation inexorably results to consideration of the role of dividends. A firm's fundamental position at this point is dependent on one's attitude toward (i) the impact of subdivision of the stream of income which supports the total capital structure and (ii) the impact of subdivision of the stockholder's share between dividends and retained earnings. This is similar to analysts of the cost of capital with regard to the impact of dividend policy on stock value. The people who consider that the shape of capital structure degree of leverage has no impact on the cost of capital also are of the perception that the value of a share of stock does not depend on the rate of dividend, and those who are of the idea that income subdivision is important for the cost of common stock in particular. (Dougall; Miller; Vandell, 1963)

Does a firm's dividend policy matter?

Since the past two decades, the issue of the impact of dividends on the prices of stock has been controversial. Till of late, the academic finance profession jointly had presented with no believable justification for corporate dividend payments. Till this point, there were just two positions on the issue of dividend which were vehemently defended by financial economists. The first one revolves around (i) dividend are extraneous. This implies that if companies retain their earnings or pay them out to the stockholders, it hardly matters to the investors on the collective front. (ii) Increased dividends result on lower stock prices as the investors who come within the tax bracket are compelled to pay higher taxes on dividends compared to capital gains. However there have at no point of time any question that dividend when announced in large amount have led to increases in stock prices, and that dividend skipping is certain to send prices on a downward trend. Nevertheless the present meaning of this phenomenon has been that these types of changes in the dividend policy give information to the market merely regarding the firm's future earning potential. (Chew, 1986)

The encouraging reaction to the declarations of increased dividends hence is silent regarding a preference by investors for dividends over capital gains. Moreover this "information effect" has therefore been implicated as being congruent with the dividend irrelevance proposal. This implies that investors on the whole are only interested on the net returns, and the intensity of total stockholders returns is not affected by decisions of management to pay out a portion of that return in the shape of dividends. A third viewpoint nevertheless has of late suggested an encouraging economic justification for corporate dividends in supplying information. Supporters of this comparatively recent line of reasoning observe that management possess considerable inside information regarding its company's promises which it cannot disclose to its investors. (Chew, 1986)


Firms reward their shareholders with cash through dividends which is known as the firm's dividend decision. Dividend distribution out of the earnings is a crucial outlay decision which should be done regularly. The dividend decision of a company is a financial one and the goal of any financial decision of a firm is making growth strides for the organization. The academic finance profession had given with no credible reason for corporate dividend payments. There were just two standing on the issue of dividend which was strongly supported by financial economists. These are (i) dividend are needless.(ii) increased dividends result on lower stock prices as the investors who come within the tax bracket are compelled to pay higher taxes on dividends compared to capital gains.


Chamberlain, Neil. W. (1962) "The Firm: Micro-Economic Planning and Action." McGraw-


Chew, Donald. H. (1986) "Six Roundtable Discussions of Corporate Finance" Quorum


Dougall, Herbert E; Miller, Merton H; Vandell, Robert F. (1963, May) "Management of Corporate Capital: Discussion" the Journal of Finance, vol. 18, no. 2, pp. 311-318.

Harvey, Campbell R. (1995) "Capital Structure and Payout Policies." Retrieved 12 September, 2007 at http://www.duke.edu/~charvey/Classes/ba350/capstruc/capstruc.htm

Mackintosh, a.S. (1963) "The Development of Firms: An Empirical Study with Special

Reference to the Economic Effects on Taxation." Cambridge University Press.

N.A. (n. d.) "Chapter 10: Dividend Policy." Retrieved 12 September, 2007 at http://www.hss.caltech.edu/courses/2005-06/Spring/bem107/Readings%20for%20Course/Damodaran%20Book/Chap10.pdf

N.A. (2005) "Distribution of Dividend- at what rate?" Retrieved 12 September, 2007 at http://www.easternbrain.com/2005/12/07/distribution-of-dividend-at-what-rate/

Wang, et. al. (2006) "The Influences of Value-Based Management on Dividend Policy."

Journal of American Sciences, vol. 2, no. 4. pp: 35-39.


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