ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
DIVIDEND POLICY AS AN INTEGRAL
PART OF THE DECISION-MAKING ON
FINANCING OF THE COMPANIES
Ismet DERDEMEZ1, Radoje CVEJIĆ2, Zoran KALIČANIN3
1
High Technical Mechanical School of Professional Studies, Trstenik, Serbia, e-mail: fakultet.tutin@live.com
2
Faculty for Strategic and Operational Management, Belgrade, Serbia, e-mail: radoje.cvejic@fsom.edu.rs
3
Faculty for Strategic and Operational Management, Belgrade, Serbia, e-mail: zoran.kalicanin@fsom.edu.rs
those dividends are paid to shareholders. The
procedure of dividend payments is different from
country to country. Some of them pay dividends on a
semi-annual or annual basis while enterprises in the
US pay out quarterly. Dividends that are paid out to
companies whose shares are publicly traded, usually
are determined by the board of directors, and a few
weeks later are paid out to shareholders (there are a
few key dates from the time when the board of
directors revealed the payment of dividends to the
moment of payment of dividends). Announcement
date of dividends (the first important date), then the
Board of Directors announce a cash dividend that is
paid out for that year (quarter). The importance of
that date is reflected in a fact that with
announcement of its intention to return, reduce or
maintain the dividend at the same level, the company
transmits the message to financial markets. If the
company chooses its decision to change its dividend,
this is the date when, realistically, will come to the
market reaction. The date on which or after which
the new owner of the shares shall not be entitled to
the dividend (another important date) is a day
without the right to collect dividends, respectively
the time until when investors should buy the shares
in order to receive the dividend paid by the
company. The share price will generally decline on
that day in order to maintain that loss, because the
investor who bought shares after that date shall not
be entitled to dividends. At the end of the working
day, a few days after the date on which or after
which the new owner of the shares shall not be
entitled to the dividend, the company concludes its
business books to transfer shares and prepare a list
of shareholders as at the date by which the owner of
shares can be registered in the list of shareholders
entitled to dividend, actually the list of shareholders
to receive dividends. And the last, no less important
day, is the payment day of dividends. The practice is
that dividends two or three weeks after the date by
which the owner of shares can be registered in the
Abstract— Strong by investment and strategically
well-positioned companies at the end of the business year
should make a decision in which amount will refund the
amount of cash to its shareholders in the form of dividends
or the decision on how they plan to withdraw funds from
the business, and how much to invest. Decisions are
similar and it is called the dividend resolutions. The main
aspect of the dividend policy is to determine the
appropriate allocation of profits between dividend
payments and an increase in retained earnings of
enterprises.
Keywords— dividend policy, cash, profit, irrelevance,
empirical testing.
I. INTRODUCTION
W
hen making decision of a strategic nature, ie,
decision on funding, a part of it is and the
decision of dividend policy. The percentage of profit
paid as dividend shows that which share of the
profits of the enterprise may retain as a source of
financing. Maintaining a large amount of current
earnings in a company means lesser funds available
for the current dividend payment. The main aspect of
the dividend policy is to determine the appropriate
allocation of profits between dividend payments and
an increase in retained earnings of the company.
Availability of information reaches the three aspects
of dividend policy. The first is a procedural issue
concerning the way in which dividends are
determined and paid out to shareholders. The second
is testing of widespread indicators of the amount of
dividends. The third refers to the empirical testing of
dividend policy.
II. IMPORTANT INFORMATION REGARDING TO DIVIDEND
POLICY
Important information regarding the dividend
policy contain answers to questions that are referred
to how the company determines the amount of
dividends, and one of the most important is how
44
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
list of shareholders. Although shareholders consider
this day as an important, even that day should not
occur an impact on the price.
When the dividend policy is seen as merely a
financial decision, payment of the dividend in cash is
a passive rest. The percentage of earnings to be paid
out as a dividend will vary from period to period, in
accordance with changes in the amount of eligible
investment opportunities that are available to the
enterprise. If these opportunities are many, it is very
likely that the estimates of paid earnings to be zero.
On the other hand, if the company is unable to find
profitable investment opportunities, dividend
payments will amount to 100% of earnings. For
situations that are between these two extremes, the
ratio of dividend payments will be some number
between zero and one. Observation of dividend
policy as a passive rest, which is determined only by
existence of eligible investment projects, is leading
to the conclusion that the dividends are not relevant.
As for any companies, the dividend capacity is a
major determinant of dividend policy for
multinationals. Key factors can be seen on Fig. 1:
Fig.1. Key factors of dividend policy
Modigliani and Miller gave the most complete
argument for the irrelevance of dividends [1]- [3].
They have proved that, with a given investment
decisions of companies, the ratio of dividend
payment is only a tiny detail. It does not affect
shareholders' wealth. Enterprise value is determined
only by the ability of earning assets of an enterprise
or its investment policy and to the way in which the
flow of earnings is divided between dividends and
retained earnings do not affect that value. Viewpoint
of Modigliani and Miller is that the effect payment
of dividends to shareholders' wealth is compensated
by other means of financing. We proceed from the
sale of additional ordinary shares to collect the share
capital instead of retained earnings. After the
company made its investment decision, it must
decide whether to: (1) keep the profits, (2) or to pay
dividends and to sell new shares in the amount of
such dividends in order to finance investments. An
ordinary share is decreasing until market price due to
dilution caused by extreme principal funding,
actually is offset by the dividend payment.
Therefore, it is said that the shareholder is indifferent
between receiving earnings of dividends and
receiving of retained profits of the enterprise. From
Modigliani’s and Miller's assumptions about safety
and perfection of capital market is followed the
irrelevance of dividends. Investors can create cash
flow of each dividend payment which would have to
ensure the corporation but is not able to. If the
dividends are less than desired, investors could sell
part of their shares in order to get the desired part of
the money. If the dividends are greater than desired,
investors can use the dividends to purchase
additional shares of the company. Investors are able
to produce dividends from "homemade", if they are
dissatisfied with the current capital structure of
companies. For corporate decision on the value,
company needs to do something for shareholders
that they can not do for themselves. Since investors
can produce dividends in homemade, which is
perfect substitute for corporate dividends with
previous assumptions that dividend policy is
irrelevant. As a result of it, one dividend policy is
good, as well as any other. The company can create
value simply by changing a combination of
dividends and retained earnings. As in the theory of
capital structure, there is conservation of value, so
that the sum of the parts is always the same. There
are many arguments in favor of the opposite
hypothesis - that dividends are relevant in terms of
insecurity. Investors are not indifferent to whether to
accept the offering in the form of income from
dividends or in the form of share price appreciation.
Dividends are received on an ongoing, permanent
basis while the prospects for the realization of
capital gains are somewhere in the future. Therefore,
investors in the company that pays dividends
immediately address their uncertainty with respect to
those investors who have invested in a company that
do not pay dividends. If investors prefer certainty,
they will be willing to pay a higher price for a share
that offers higher dividend, if all the other elements
are unchanged. Only when the investors could create
their own dividends, the listed preference would not
be rational. Due to psychological reasons or due to
45
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
the need of sense of ease, investors prefer to obtain
"a competitive thing," directly from the company,
rather than to produce dividends on their own.
The effective tax on capital gains (in present value
terms) is less than the tax on income from dividends,
even when the federal tax rate on the two types of
income is equal. This would mean that the share
which gives a dividend must have a higher expected
return before tax then a share that does not pay
dividend and has the same risk. In accordance with
this fact, the higher is return of dividend on the share
the required return before tax is higher, if all other
elements are equal.
The irrelevance of dividend payments is based on
the idea that when there are good investment
opportunities and when dividends are paid, the
resources that the company pays have to be
compensated by resources that are obtained with
external funding. Introduction to the costs of
emissions is associated with external financing,
which favors the retention of earnings in the
company. For every dollar that is paid as a dividend,
company must recover every dollar of external
financing including amounts of less than a dollar
after the cost of emissions.
Transaction costs involved in the sale of securities
slow down the arbitration process in the same way as
described for the debt. Shareholders who want
current income must pay a brokerage commission on
the sale of part of their shares if they consider that
dividend payments is not satisfactory with regard to
their current preference for income. Due to these
benefits, the shareholders who have a higher demand
compared to the current dividends will prefer that
the company pay additional dividends. Perfect
capital markets also assume that the securities are
infinitely divisible. The fact that the smallest unit of
share capital is one share, it may result in
"inadequacy of scale" when the shares are
marketable. It also acts as a barrier to the sale of
shares instead of dividends.
The share price can positively react to this
increase in dividends. The idea is that the company's
accounting earnings from financial statements may
not reflect the true reflection of economic profit of
the company. The share price will respond to an
extent that dividends provide information about the
economic profits. In other words, dividends in cash
are used to investors as indicators of future business.
Dividends reflect management expectations in the
future.
The company should be aimed to establish a
dividend policy that will maximize shareholders'
wealth. Almost everyone agrees that the corporation
would provide to its shareholders the surplus funds
in the absence of profitable investment opportunities.
The company does not have to pay the total amount
of unused earnings in each period. In fact, it can seek
the stabilization of the absolute amount of dividends
paid from one to period. In the long term, total
retained earnings and additional old securities,
factors that increase the share capital, will match the
amount of new profitable investments. Dividend
policy would still be a passive rest, which is
determined by the amount of investment. In order
the company had justification for the payment of
dividends which are higher than the amount of
retained earnings, although have been taken all
reasonable investments, there must be a net
preference for dividends on the market. It is very
difficult to "ignore" the arguments that we have just
discussed to get to the basics. In support of the
dividends go only investment restrictions and some
preferences for investors.
III. SECURITY AND STABILITY OF DIVIDENTS AND
FACTORS THAT AFFECT THEM
Dividend policy is becoming a critical weapon,
although sometimes neglected, in the fight to reduce
agency costs. Agency costs arise when the interests
of managers and shareholders disagree. This tension
can be increased when it comes to ranking on the
nature and level of compensation for executive
directors and up to the rate at which the executive
directors will reinvest profits. Returning of funds to
shareholders,
dividend
rightfully
increases
responsibility of decisions on reinvestment that is in
the hands of the owner of the company. Dividend
policy represents only one group of tools - as well as
a well-designed system of compensation - to manage
the agency's problems. If management and the board
of directors review their management policies, they
will see that the dividend should be placed on top of
the list. It will always be difficult to make such a
system, which will cause the executive authority to
act as well as the owners in every way. Instead of
wondering why to pay more, executive directors and
board of directors should ask themselves whether it
is really in the best interest of company not to do so.
Though the laws in the countries differ
significantly, most states prohibit the payment of
dividends, if such dividends decrease the capital.
Capital, in some countries, is defined as the total
Alpari value of common shares. Other countries
define capital so that it includes not only the overall
Alpari value of ordinary shares, but also the
premiums paid in capital. In addition to these state
regulations, dividends can be paid only "up to the
amount of retained earnings". The company pays out
a dividend "from the money", while the
corresponding reduction is recorded in the account
of retained earnings. It is interesting that in some
countries dividend not only can not exceed the bookkeeping amount of the retained earnings of
companies, but also the overall book-keeping value
of share capital. Some countries prohibit the
46
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
payment of dividends in cash if the company is
insolvent. Since the company's ability to pay its
obligations depends more on its liquidity than of
capital, restriction of technical insolvency provides
the creditors good protection. When money is
limited, the company is not allowed to elect the
shareholders to the detriment of creditors.
When establishing the legal limit to the dividend
policy of companies, the next step is the evaluation
of resources needed to company. The key is to
determine the possible cash flows and cash position
of the company if there are no changes in the
dividend policy. Except that we must consider the
expected results, we should anticipate and the
business risk so that we get a number of possible
cash flows.
When taking decisions on dividends, primarily is
considering the liquidity of the company. Since the
dividends are cash outlay, the greater is the cash
position and overall liquidity of the company, the
greater is the ability to pay dividends. A company
that is growing and that is profitable, may not be
liquid because its funds can go into fixed assets and
permanent working capital. Since the management
of such companies often wants to maintain a certain
level of liquidity due to the financial flexibility and
protection in the event of uncertainty, it does not
want to jeopardize that position by paying huge
dividends.
Liquid position is not the only way to ensure
financial flexibility and protection against
uncertainty. If the company is able to borrow funds
in a relatively short period of time, it may be in the
form of lines of credit or revolving loan agreement
with the bank or simply informal willingness of
financial institutions to extend credit.
Financial flexibility may result from the ability of
the companies to appear in the capital market with
bond issue. As the company is larger and better
known, its entry in the capital market is easier. What
is the ability to rent the company greater, the greater
is its financial flexibility, and therefore its ability of
dividend payments in cash. With the current
borrowing capacity, management should be less
concerned about the effect that the dividends have in
cash on liquidity.
If a company pays huge dividends later may need
to raise capital by selling the shares in order to
finance profitable investment projects. In addition to
these circumstances, a controlling interest of the
company may be reduced if shareholders who
possess a controlling package of shares are not
willing or able to enroll additional shares. These
shareholders may choose the payment of less
dividends and financing of investment needs by
means of retained earnings. Such dividend policy
does not have a maximum increase of shareholders'
wealth, but it can still be in the interests of those
who have a control package.
Control can be implemented in a different, a
completely various way. When the company is
considered by other companies or individuals to
acquire, low dividend payments may act as
advantage for those outside of companies who want
the control package. They are able to convince the
shareholders that the company does not act in order
to maximize shareholder wealth and they (outsiders)
can do it better. Companies that are at risk of
takeover can determine the high dividend payments
to please the shareholders.
The stability of dividend payments is an attractive
feature for many investors. If all the other elements
are unchanged, the share can has the higher price if
during the time pay a stable dividend instead of
paying a fixed percentage of earnings.
Investors may be willing to pay a premium for a
stable dividend for information content of dividends,
due to their demand for current income and certain
institutional constraints.
When profits fall, and the company does not
reduce its dividends, the market may have more
confidence in share than the company reduced the
dividend. Stable dividend could mean that the
expectations of management with respect to future
are better than it currently shows a decline in
earnings. So management can influence the
expectations of investors through informative
content of dividends. However, management cannot
constantly keep cheating on market. If there is a
declining trend in earnings, stable dividend will
forever leave an impression of bright future.
Moreover, if a company is in an unstable job with
strong fluctuations in earnings, stable dividend can
not ensure the fundamental illusion of stability
operations.
It appears that most companies follow a long-term
policy of targeted relationship on dividend
payments. It appears that most companies follow a
long-term policy of targeted relationships of
dividend payments. When profits rise to a new level,
the company is increasing the dividend only if it
considers that the increased profits will be held.
Companies are also very reluctant to reduce the
absolute amount of their dividends in cash. Both of
these factors explain why changes in dividends often
lag behind changes in earnings. In the ascendant
period of economic growth, the gap between
dividends and earnings becomes visible when
retained earnings grow in relation to dividends. On
the contrary, the retained earnings will decrease in
relation to dividends.
One of the way that the company to increase the
distribution of money to its shareholders during the
period of prosperity is a voting of extraordinary
dividend along with the ordinary dividends that are
usually paid out on a quarterly or semi-annual basis.
47
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
After voting for the extraordinary dividend the
company warns the investors that this dividend is not
an increase of the established rate of dividends. Vote
of extraordinary dividends is particularly suitable for
companies that have fluctuating profits. Using of
extraordinary dividends allows the company to
maintain a steady flow of regular dividends, while
also distributing a certain premium achieved due to
progress. If the company continuously pays
extraordinary dividends, it denies their purpose.
Extraordinary dividend becomes expected. When is
properly set, an extraordinary or special dividend
always provides a market the positive information
about the current and future business operations.
main purpose of fragmentation is that the share looks
like more attractive for the purchase, and with that
(with any luck) attract more customers. To company
will be very difficult to maintain the same dividend
in cash per share before and after the fragmentation
of shares. But it can increase the effective dividend
for shareholders.
Theoretically, the dividends in shares or
fragmentation of the shares for the investor have no
value. They get into the ownership additional shares,
but their ownership share in the company remains
unchanged. The market price per share should be
reduced proportionally, so that the total value of the
ownership share remains unchanged. In theory, the
dividend in shares or fragmentation of the shares is
purely cosmetic changes.
If an investor wants to sell a number of shares in
order to achieve the income that can be facilitated by
the dividends in shares/fragmented shares. Of
course, and without dividends in shares/fragmented
shares, shareholders may also sell a number of their
original shares in order to obtain income. In any
case, the sale of shares is the sale of principal and is
subject to capital gains tax. It is certain that some
investors do not consider the sale of additional
shares
resulting
from
the
dividend
in
shares/fragmented shares as a sale of principal. For
them, the dividend in shares/fragmented shares are
additional benefit. They can sell the additional
shares and still retain their original shares. For such
shareholders dividends in shares/fragmented shares
can have a positive psychological effect.
Sometimes the dividends in shares are used in
order to preserve cash. Instead of increasing the
dividend in cash when rising earnings, the company
can keep much of its earnings and votes for less
dividends in shares. That decision effectively results
in lowering relationship of dividend payment: when
earnings increase, but dividend still remains
approximately the same, the ratio of the dividend
payment will be cut down. Will this share increase
shareholders' wealth depends on the matters we have
previously discussed. The decision to retain a larger
portion of earnings, of course, can be made without a
dividend in shares. Although the dividends in shares
can satisfy some investors because of their
psychological effect, the substitution of cash
dividends for common shares involves fairly large
administrative costs. Dividends paid in shares are
more expensive to administrative processing rather
than dividends in cash, ie. cash outlay is the lack of
dividend in shares.
Fragmentation of shares and to some extent the
dividends in shares are used to make shares more
attractive for sale in a way that to attract more
customers and influence to the structure of
shareholders when increasing shares of individual
shareholders and reducing shares of institutional
IV. DIVIDENTS IN SHARES, FRAGMENTATION OF SHARES
AND MERGER OF SHARES
The dividend in shares is the payment of the
additional common shares to shareholders. It does
not constitute an accounting change within the
account in the share capital in the balance sheet of
the company. The ownership share of shareholders
in the company remains unchanged. Accounting
makes the difference between a small percentage of
dividends in shares and the high percentage of
dividends in shares [4], [5], [6], [7].
A large percentage of dividends in shares (usually
25% or more of the previously issued ordinary
shares) must be seen differently. While for a small
percentage is not expected to have a major effect on
the market value of shares, for a large percentage of
dividends in shares are expected to significantly
reduce the market price of shares. Therefore, in the
case of a large percentage of dividends in shares, the
conservative view advocates the re-classification of
amount limited to Alpari value of additional shares
rather than the amount that relates to the market
value of a dividend in shares.
In case of fragmentation of the shares, the number
of shares increases with the proportional decrease in
alpri values of shares.
On dividends in shares, an alpari value of
common shares is not reduced, while in the
fragmentation of the shares it reduces. From this it
follows that the fragmentation of the shares, account
of ordinary shares, premium on additional paid-in
capital and retained earnings remain unchanged.
Total share capital, of course, remains the same.
Total share capital, of course, remains the same. The
only change is happening in Alpari value of ordinary
shares, which is now based on the value per share
half of earlier values. In addition to the accounting
monitoring, dividends in shares and fragmentation of
the shares is very similar. Fragmentation of the
shares (or, alternatively, a large percentage of the
dividend in shares) is usually reserved for occasions
when a company wants to achieve a significant
reduction in the market price of common shares. The
48
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
shareholders.
Rather than to increase, the company can reduce
the number of ordinary shares in circulation. This
can be achieved by summing up the shares.
Summing up of shares are applied to increase the
market share price, when is consider that the share is
sold at too low price. In some cases, it is an attempt
to remain on the lists of the greatest stock market
shares, because a big drop in prices could lead to
removal from the list. Many companies do not like
the price of their shares fall significantly below $ 10,
per share.
As with dividends in shares and ordinary shares of
fragmentation, it is very likely that will appear
information or effect signaling that is associated with
the announcement of the return merger of shares.
Usually, that signal is negative, as is negative and
the signal that occurs when a company admits to
having financial difficulties. However, financial
difficulties do not have to be the main motive for the
merger. Maybe the company simply wants to raise
the share price to a higher level of trade, where the
overall trading costs and services are lower. Still,
information from practice suggest consistency of
statistically significant decline in the share price
about the date of publication on merger of shares,
assuming that all other factors are unchanged [8][11]. The fall can be reduced by past successful
operations of the company, but a good company
would nevertheless think twice before it implements
the merger of shares. There are too bad apples in the
barrel that could spoil everything.
funds of increased dividends. When there is no
personal incomes tax and transaction costs, these
two alternatives theoretically should not represent a
difference for shareholders. In the case of
redemption, the fewer the number of shares that
remain in circulation earnings per share and the
dividend per share should rise, which would also
cause the growth of the market price share. In
theory, the capital gain arising from the purchase
should be equal with the dividend that would
otherwise be paid.
Purchase of shares takes precedence over payment
of dividends in cash in terms of taxation of investors
to that extent that the tax rate on capital gains is
lower than rates on income from dividends. Capital
gains tax is paid only when the shares are sold, while
the dividend tax must be paid immediately.
Repurchase of shares is particularly appropriate in
situations when a company has a very large surplus
of money for distribution. If these funds are paid to
shareholders through an extra dividend, they would
immediately have to pay taxes. The company must
closely acts that do not develop a permanent
program to buy back shares in lieu of payment of
dividends.
Some under the redemption of shares considered
decision about investing, and not on financing. In
fact, in the narrow sense, repurchase in fact it is,
although shares held as purchased own shares does
not provide the expected return as is the case with
other investments. No company can take if you
"invest" only in their actions. No company can last
long if "invest" only in its shares. The decision to
repurchase shares should include the distribution of
surplus funds when investment opportunities of
companies are not attractive enough to justify the
investment of these funds now or in the foreseeable
future. Therefore, the repurchase of shares cannot
really be seen as an investment decision in terms of
its definition. Repurchase of shares is best viewed as
a kind of a decision on financing for the motive
which has a capital structure and dividend policy
[16]- [20].
Many large companies have plans for the
reinvestment of dividends (DRIP). Within these
plans, shareholders have the opportunity to reinvest
their dividends in cash in additional shares of the
company. There are two basic types DRIP, which
vary according to whether additional shares come
from existing ordinary shares or new cash issue. If
you use the existing shares, the company transfers
the dividend in cash of all shareholders who wish to
reinvest in the bank acting as trustee. Then the bank
buys shares of companies on the open market. Some
companies even bear all brokerage costs that arise
when purchasing shares during the reinvestment. But
in the DRIP, in which shareholders alone bear the
brokerage costs, these costs are relatively low
V. REPURCHASE OF SHARES AND REINVESTMENT OF
DIVIDENTS
The three most common of repurchase, [12]- [16],
are independent public offers of fixed prices, the
Dutch auction of self-public offer and repurchase on
the open market. On an independent offer of fixed
price, the company provides a formal offer to
shareholders to purchase a certain number of shares,
usually at a specific price. The offer price is above
the current market price. Shareholders may choose
to sell their shares at a specific price or they still
hold them. Period offer usually takes two to three
weeks. If shareholders offer more shares than the
company originally wanted to repurchase, the
company may choose to redeem all or part of the
surplus. However, it is under no obligation to do so.
As a rule, the costs of transactions are higher for a
company that makes an offer higher than those
incurred by purchasing shares on the open market.
If a company has excess cash and insufficiently
profitable investment opportunities to justify the use
of these funds, the distribution of these funds may be
in the interests of shareholders. Distribution can be
in the form of redemption of shares or payment of
49
ANNALS OF THE UNIVERSITY OF ORADEA
Fascicle of Management and Technological Engineering
ISSUE #3, 2015, http://www.imtuoradea.ro/auo.fmte/
because the trustees buy shares in large quantities.
Another form of invested plan relates to the
issuance of new shares. The company just with this
method really can gather new assets. This kind of
plan has proven to be particularly popular for those
companies that need fresh capital for the
construction and improvement. Effectively, such a
plan reduces the payment of dividends in cash in the
company.
shareholders. In many other situations, the shares are
redeemed with the right intention to be withdrawn. If
you look at the total money that corporations
distributed to shareholders in cash dividends,
repurchase of shares and the takeover bid - dividends
are only one (but not always the primary)
mechanism for allocation of money.
Dividend reinvestment plans (DRIP) allow
shareholders to automatically reinvest the paid
dividends in additional shares of the company.
VI. CONCLUSION
REFERENCES
Access to the irrelevance of dividends simply
affirms that the present value of future dividends
remain unapplied even if the dividend policy
changes in the schedule and size of dividends. Ie
does not say that the dividends, including and the
liquidation dividends never be paid out. On the
contrary, it says that the postponement of dividends
(but only in a case when is expected growth of future
dividends) has no effect on the market price of
shares.
The vote of dividend in shares or fragmentation of
shares can provide information to investors. As we
have already said, in certain situations, management
may have better information about the company than
investors. Instead of that information to the media,
management could use the dividend in shares or
fragmentation of shares that would convincingly
demonstrated its confidence in the positive outlook
of the company. Does that signal a positive effect on
the share price, is an empirical question. The
evidence is abundant. There is a statistically
significant positive stock price reaction to the
announcement of dividends in shares and
fragmentation of shares. Information has the effect
of the fact that the stock is undervalued and should
have a higher value. But we should be careful in
interpreting these results. As it turned out, the
dividend in shares and fragmentation of shares
typically come before dividends in cash and increase
of profits. Market observers dividends in shares and
fragmented shares as leading indicators of larger
dividends in cash and increased earning capacity. So,
not only the dividends in shares or fragmented
shares those which condition the positive reaction
of the share price, but good information indicates
these signals. Also, the company must pay a higher
dividend and earnings, if it wants the share price to
is higher.
Some companies repurchase their shares in order
to have stimulation by management. In this way it
does not increase the total number of shares. Another
reason for the repurchase of shares is that their
shares to be available for the acquisition of other
companies. In certain cases, companies that no
longer want to be in the public ownership "become
private-owned" by repurchase of all shares of foreign
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
[19]
[20]
50
P. Asquith, and D.W. Mullins, “The Impact of Initiating Dividend
Payments on Shareholders' Wealth,” Journal of Busines, vol. 56
1983, pp. 77-96.
L.S. Bagwell, “Dutch Auction Repurchases: An Analysis of
Shareholder Heterogeneity,” Journal of Finance, vol. 47 1992, pp.
71-105.
H.K. Baker, A.L. Phillips, and G.E. Powell, “The Stock
Distribution Puzzle: A Synthesis of the Literature on Stock Splits
and Stock Dividends“, Financial Practice and Education, vol. 5
1995, pp. 24-37.
H.K. Baker, and E.G. Powell, “Determinants of Corporate
Dividend Policy: A Survey of NYSE Firms. Financial Practice
and Education, 10 (Spring/Summer 2000), 29-40.
D.M. Bliine, and C.P Cullinan, “Distributions to Stockholders:
Legal Distinctions and Accounting Implications for Classroom
Discussion,“ Issues in Accounting Education, vol. 10 1995, pp.
307-316.
M.S. Grinblatt, W.R. Masulis, and S. Titman, “The Valuation
Effects of Stock Splits and Stock Dividends,“ Journal of
Financial Economics, vol. 13 1984, pp. 461-490.
J. Lintner, “Distribution of Income of Corporations Among
Dividends, Retained Earnings, and Taxes,“ American Economic
Review, vol. 46, 1956, pp. 97-113.
R.H. Litzenberger, and K. Ramiswamy, “Dividends, Short Selling
Restrictions, Tax-Induced Investor Clienteles and Market
Equilibrium,“ Journal of Finance, vol. 35, 1980 pp. 469-482.
R.F.L. Litzenberger, and C.J. Van Horne, “Elimination of the
Double Taxation of Dividends and Corporate Financial Policy,“
Journal of Finance, vol. 33 1978, pp. 737-749.
J. Markese, “Common Stock Dividends: What Are They Worth?“
AAII Journal, vol. 11, 1989, pp. 29-33.
M. McNichols, and D. Ajay “Stock Dividends, Stock Splits, and
Signaling,“ Journal of Finance, vol. 45, 1990, pp. 857-879.
M.H. Miller, “Behavioral Rationality in Finance: The Case of
Dividends,“ Midland Corporate Finance Journal, vol. 4, 1987,
pp. 6-15.
F.L. Merton, and K. Rock. “Dividend Policy under Asymmetric
Information,“ Journal of Finance, Vol. 40 1985, pp. 1031-1051.
S.F. O'Byrne, and J. Pettit, “Stock Splits: What Good Are They?“
Shareholder Value, vol. 2, 2002, pp. 34-39.
K. H. Al-Yahyaee, “Shareholder wealth effects of stock dividends
in a unique environment,” J. Int. Finance. Mark. Institutions
Money, vol. 28, pp. 66–81, Jan. 2014.
K. Chang, E. Kang, and Y. Li, “Effect of institutional ownership
on dividends: An agency-theory-based analysis,” J. Bus. Res.,
Oct. 2015.
A. De Cesari and W. Huang-Meier, “Dividend changes and stock
price informativeness,” J. Corp. Financ., vol. 35, pp. 1–17, Dec.
2015.
E. Floyd, N. Li, and D. J. Skinner, “Payout policy through the
financial crisis: The growth of repurchases and the resilience of
dividends,” J. finance. econ., vol. 118, no. 2, pp. 299–316, Aug.
2015.
J. Kanniainen, “Option pricing under joint dynamics of interest
rates, dividends, and stock prices,” Oper. Res. Lett., vol. 39, no. 4,
pp. 260–264, Jul. 2011.
D. Brawn and A. Sevǐc, “Net payout return: An alternative to the
traditional returns approach based on dividends and share
repurchases,” Finance. Res. Lett., vol. 13, pp. 66–73, May 2015.