The impact a dividend policy has on a firm

The agency issues occurs when there is an excess cash flow in the organization and they have to invest in profitable projects but they utilize the cash in their own interest instead of shareholders. Total number of observations in this study were Dividend Relevance Theory: The value of a firm is affected by its dividend policy.

In their paper, MM theorized that dividend policy has no impact on stock price and cost of capital, resultantly the dividend policy of a firm becomes trivial for shareholders wealth.

Articles on dividend policy pdf

Their findings suggested that dividend policy has no impact on return on equity. Bird-in-hand theory Lintner and Gordon developed this theory which proposes that investor is always risk-avoider and desires to obtain dividend instead of capital gains in future. Clientele effect Clientele effect highlights another aspect of relevance theory. Moreover, dividend policy can be utilized to minimize agency costs. Here, bird in the hand is considered as dividend, whereas bird in bush is assumed to be capital gain. Profit being the main economic drive for firms, can be attributed to two main destinations: it can be held in the firm to be used for its future growth, or can be distributed to shareholders. Optimal Dividend Policy: Proponents believe that there is a dividend policy that strikes a balance between current dividends and future growth that maximizes the firm's stock price. Therefore, the investor becomes indifferent. Kioko further studied these variables and found positive impact of both on each other. Rigar and Mansouri studied the association between performance of firm and dividend policy. Its results vary significantly across different countries so researchers have a huge space to explore this issue in different countries.

What they decide depends on the situation of the company now and in the future. In actual they give signal to market.

impact of dividend policy on firm value

He found that there is a positive linkage between changes in dividend and future profitability. This study covered the time period of —

Determinants of dividend policy

International evidence One of the studies has been conducted by Iminza on information content of dividend payments and its impact on prices of shares of public listed firms. Another study has been conducted by Hasan, Ahmad, Rafiq, and Rehman to check an association between dividend policy and earning per share in textile and energy sectors of Pakistan. Some have studied the effect of macroeconomic factors on dividend policy, whereas some have investigated the impact of firm specific factors on dividend policy. Dividend Relevance Theory: The value of a firm is affected by its dividend policy. It means share prices depend on the changes in dividend policy. Kioko further studied these variables and found positive impact of both on each other. Cash Dividends or stock dividends Option I is suitable for firms which need funds to finance their long term projects, which have growth potential and sufficient profitability. Potential investors and shareholders decide to invest in the company by investigating its capacity of paying dividends. Widyastuti conducted a study to investigate the influence of dividend policy on firms value and showed positive relationship between both variables. Ouma also found the same results. On the other hand, dividends are not as much risky as capital gains. Others have also studied the consequences of dividend policy individually in different countries and industries.
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Impact of Dividend Policy on Organizational Capital Structure