Dividend Policy and the Lintner Model - Term Paper Example

The paper "Dividend Policy and the Lintner Model" is a brilliant example of a term paper on finance and accounting. Dividend policy is one of the most puzzling issues in the field of corporate finance and represents the way the company distributes its profits to the shareholders or reinvests part of the profits to carry out its investment programs. Academics have written a number of theories that are mostly concerned with what affects dividend policy and how the latter affects the stock price of a firm. In the following paper, we shall examine a number of theories written on dividend policy and especially the Lintner model theory. A theory stating that the dividend policy adopted by a company depends on two parameters, the target payout ratio and the speed where current dividends adjust to that target.

We shall review the conflict of interest between managers and investors, the declining trend of paying dividends, and the increasing trend of the share repurchase policy. However, the firm’s debt and investment policy are a catalytic factor in the payout policy that it adopts. The company’s capital structure and budget constraint relate to these three policies.

Finally based on a set of historical data of earnings per share and distributed dividends of a sample of UK companies for the period 1980 – 2007, we tested the Lintner model by regressing the variables of dividends with earnings per share of the current period and the dividend of the previous period. It turned out that the Lintner model is valid for 30 of the sample companies. In the rest of the sample companies, the misinterpretation can be attributed to a probable violation of the assumptions made by the Lintner model.

The most important reasons for investing in shares are income, capital growth, or both. Shares can generate an income stream through dividend payments. A firm will either reinvest its profits to carry out investment programs or it will pay a fraction of the earnings in the form of dividends.

Dividend policy has received a lot of attention in the academic literature and despite the plenty of research that has been made it still represents a puzzling issue. Academics are mostly concerned with what affects dividend policy and how the latter affects the stock price of a firm.