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Discuss the Proposition that a Company's Dividend Policy is Irrelevant to its Market Value. - Essay Example
Finance & Accounting
Pages 7 (1757 words)
Discuss the Proposition that a Company's Dividend Policy is Irrelevant to its Market Value Dividend irrelevance theory basically signifies that an issuance of dividends must have little or no impact on stock price. This theory is “A postulation that the dividend policy of a company should have minimal effect on the investment decisions made by an investor due to the fact that the payment or non-payment of a dividend will not necessarily impact the net return to the investor…
Some argue that dividend policy will not affect the wealth of the shareholders, whereas some have the opinion that the decisions about dividend policy will affect the shareholder’s wealth and the firm’s valuation. “Dividend policy refers to the decision regarding the magnitude of the dividend payout, the percentage of earnings paid to the stockholders in the form of dividends. The central, and as yet unresolved, issue concerning dividend policy is whether changes affect firm value” (Dividend Policy 2012). Following are the factors which influence the dividend policy: • Market deficiency for example taxes, agency costs, asymmetric information, flotation costs and transaction costs. • Behavioral considerations for instance illogical shareholder behavior, behavioral desires of shareholders and usual behaviors of firms. • Industry characteristics for example profitability, size, investment opportunities, availability of cash on probable cash flows and future earnings. • Managerial likings for example smoothing of dividends and the disinclination to decrease future dividends. ...
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