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Does it matter whether or not firms pay dividends? Why? - Essay Example
Author : qschumm
Finance & Accounting
Pages 6 (1506 words)
Dividend is an important mode of payment through which companies share a portion of their profits to the shareholders. Therefore, dividend payment indicates the profitability of firms. Dividend payment policies are generally set by the top management and board of directors. …
According to the MM hypothesis, market value of a company determines the market value of assets that the company has and cash flow of the company. Therefore, if total payout increases then shareholders have to fill up gap and generally it can be made up by issuing new shares. However, if the company wants to unchanged the dividend payout then dividend payout will decrease as no of issued share increases. Therefore, the shareholders can repurchase shares to get the same money back as dividend. In this way, it can be said that increasing dividend payment may reduce shareholders’ gain. Before the publication of MM theories, people who are in the right side of this argument believed that higher dividend leads to increase in firm value as well as shareholders’ payoffs. These people prefer to invest only those companies that pay higher dividend because they think there are some natural calamities in the stocks of higher dividend payouts. Shareholders are more cautious in their investments and they generally prefer profitable as well as safe investment in terms of the large multinational companies. ...