The different tax treatment between dividends and capital gains however generally work against the former. A number of companies pay dividends and in some, it is a given in the way their organizations are run. This paper will explore why anyone cares about it at all. Specifically, this paper will address the questions why companies pay dividends; why investors pay attention to it; do dividends affect an organization’s value and how do managers use dividends in the organizational financial management; among others. The idea is to identify whether dividends have any bearing or effect on an organization particularly in terms of equity and firm value.
The review on the current dividend literature provided in the following section is particularly focused on the areas related to the positive and negative characteristics of dividends to business organizations. Such outline of studies was aimed at determining how other scholars answered the question posed by this paper. The review summarizes the current studies and research on dividends policy, particularly. An important dimension to the review, however, which would have a pivotal effect on this paper as a whole was the passage of the Jobs and Growth Tax Relief Reconciliation Act.
The corpus of literature available in regard to corporate payout policy and dividends is extensive. However, this review would focus on two major areas: why do dividends matter for corporations and does it matter how business organizations distribute cash to its shareholders.
Miller and Modigliani are considered to be the authorities in regard to framing dividend questions in their finance research. They, particularly focused on how dividend policy is considered a choice between financing with internal equity or financing with external equity. In their study, Miller and Modigliani offered proof that dividends do not matter in a world that is characterized by
(Tyson 2006, p. 215) When a firm declares and issues a dividend to its shareholders, this payment is not tax deductible and, instead, the receipt of it generally is considered…
If the firm decides to issue dividends to shareholders, the dividend policy which it is following will delineate whether or not the dividends payout will be continuous or if the issue of dividends is infrequent and on time to time basis. The payout of dividends is dependable on the company’s earnings for a relevant period, its standing and performance in the near future.
There are two types of dividend payment modes. These are cash dividend and stock dividend. In case of cash dividend the shareholders receive dividend cheque from the companies of which they hold the shares.
One of the best ways to enhance shareholders' value is to build a consistent dividend policy over the years that could create value addition to the Company and ensure shareholder loyalties by consolidating and building up its position in the turbulent high waters of competitive business operations
Whether to pay dividends or not and if yes by how much is determined by the dividend policy of the firm.
Dividend Policy of a firm depends on several factors like Firms Financial needs, its future growth plans and earnings and investment opportunities, investors need for income or dividends, firms fund raising capacity and control of authority as well as government decision on incomes from dividends and capital gains.
ls.(Frankfurter 2002).The third view is that firm dividend policy is irrelevant in stock price valuation. (Frankfurter 2002.These views are best summed up as being based upon, the tax effect ( Litzenberger and Ramaswamy (1980),)Clientele effects explanations (Elton and Gruber, 1970), Agency theory explanations(Easterbrook 1984), Signaling models(John and Williams (1985), and psychological/sociological explanations ( Frankfurter and Lane 1992).
The author states that providing dividends to the share holders in the form of cash is dragging out the money available in the firm and therefore the market capitalization of the firm should reduce by the same amount as the total dividends given, because the market capitalization is directly related to the share price.
Stockholders have certain requirements that need to be taken into consideration in determining dividend policy or formulation of an appropriate dividend structure.
Arriva is the one of the biggest names in the transport service business in the
The dividend policy which a company adopts is established on the above two options. As soon as a decision is taken a stable dividend policy can be adopted by the company. These dividend policies determine the outlook of the investors as