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Dividend Policies

Dividend Policies

Dividend policies dictate the amounts to be paid to shareholders and the regularity of payment. This policy dictates if the firm will share the profits earned at the end of the fiscal year or if it will retain the profits (retained earnings). The system also determines how the firm would pay back its investors, either through stock repurchase or payment of dividends (Firth et al., 2016). Dividend policy is vital to firms since it entails a firm’s corporate strategy. The plan is also essential to companies as it is tied to raising financial capital for the firm. A firm seeking to raise funds would opt not to pay dividends to shareholders and instead plow back the profits earned (Dereli & Topak, 2018). The policy is also essential, seeing that increase in dividend payout would cause an increase in the value of the stock, which would be beneficial for the firm.

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Firms may stay with their dividend policy depending on their financing requirements and corporate strategy. Firms in the growth stage are characterized by rapid expansion that requires significant capital requirements (Firth et al., 2016). Also, such firms incur losses and less profit; hence they would not be able to pay dividends to their shareholders. Dividend irrelevance assumes that the dividend payouts do not significantly influence the stock price (Dereli & Topak, 2018). It is based on the following assumptions; personal and corporate taxes are non-existent, transaction costs are zero, the cost of capital is not affected by leverage, information symmetry that both managers and investors have similar information regarding the firm’s prospects, dividend policy does not involve capital budgeting, and the division of income between retained earnings and dividends does not influence the cost of equity.

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Firth, M., Gao, J., Shen, J., & Zhang, Y. (2016). Institutional stock ownership and firms’ cash dividend policies: Evidence from China. Journal of Banking & Finance, 65, 91-107.

Dereli, H., & Topak, M. S. (2018). The Effect of Dividend Policy on Stock Price: Evidence from An Emerging Country.


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Dividend Policies

  • What are some of the aspects of dividend policies? Why are these important to companies? Why do firms tend to stay with their dividend policy?
  • What are the assumptions associated with dividend irrelevance?

    Dividend Policies

    Dividend Policies

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