Gross Theories and the Arguments

International Bulletin of Organization Administration ISSN: 1451-243X Issue 9 (2010) © EuroJournals, Inc. 2010 http://www.eurojournals.com

Dividend Policy: A Review of Theories and Empirical Facts Husam-Aldin Nizar Al-Malkawi Related Author, Faculty of Business, ALHOSN University P. U. Box 38772 - Abu Dhabi, UAE E-mail: h. [email protected] stryge Michael Rafferty Senior Research Analyst, WRC, University of Sydney, Quotes E-mail: meters. [email protected] usyd. edu. au Rekha Pillai Faculty of Business, ALHOSN University, Abu Dhabi, UAE E-mail: l. [email protected] d?gge Abstract The literature on dividend plan has produced a large human body of assumptive and empirical research, especially following the syndication of the dividend irrelevance speculation of Miller and Modigliani (1961). Simply no general general opinion has yet emerged after several years of investigation, and scholars can often disagree actually about the same empirical evidence. This paper is aimed at providing you with a complete understanding of dividends and dividend policy by reviewing the primary theories and explanations of dividend plan including gross irrelevance hypothesis of Callier and Modigliani, bird-in-the-hand, tax-preference, clientele effects, signalling, and agency costs hypotheses. The paper also attempts to present the main empirical studies about corporate dividend policy. Nevertheless , due to the enduring nature and extensive range of the debate about dividend policy which includes spawned a vast amount of literature that grows each day, a full report on all arguments is certainly not feasible. The paper actually reaches at a conclusion that the famous statement of Fisher Black regarding dividend insurance plan " the harder we look at the returns picture, the greater it seems like a puzzle, with pieces that just do not fit together" (Black, 1976, s. 5) continues to be valid.

Keywords: Dividends, Dividend Policy, Dividend Policy Theories JEL Category Codes: G30, G32

1 ) Introduction

In corporate finance, the fund manager is normally thought to confront two functional decisions: the investment (or capital budgeting) and the auto financing decisions. The administrative centre budgeting decision is concerned using what real property the company should acquire while the funding decision is concerned with just how these resources should be financed. A third decision may arise, however , when the firm starts to generate profits. If the firm distribute all or percentage of earned profits as dividends to the shareholders, or should it be ploughed back into the company? Presumably, in taking virtually any course of action, managers should focus on how to maximise the useful shareholders to get whom the 171

company is being handled. Managers should never only consider the question showing how much of the industry�s earnings happen to be needed for purchase, but as well take into consideration the possible effect of their decisions on reveal prices (Bishop et ing., 2000). The term ‘dividend policy' refers to " the practice that administration follows for making dividend payout decisions or perhaps, in other words, the size and style of cash droit over time to shareholders” (Lease et approach., 2000, p. 29). This issue of dividend policy can be one that offers engaged managers since the birth of the modern business corporation. Surprisingly then dividend policy remains one of the most competitive issues in finance. The study of dividend policy has captured the attention of finance scholars since the middle of the last hundred years. They have attemptedto solve a lot of issues pertaining to dividends and formulate hypotheses and designs to explain company dividend behavior. The dividend enigma hasn't only recently been an enduring a significant finance, in addition, it remains conflicting. Almost 30 years ago Dark (1976) explained it as being a " puzzle”, and since then simply an enormous quantity of studies have occurred planning to solve the dividend problem. Allen, Bernardo and Welch (2000, s. 2499) summarised the current general opinion view when they concluded " Although numerous theories have been completely put...

References: [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35]

Auerbach, Alan T., 1983, Stockholder Tax Prices and Organization Attributes, Log of Open public Economics 21, 107-127

198

[104] Miller, Merton L., and Franco Modigliani, 1961, Dividend Plan, Growth, plus the Valuation of Shares, Record of Organization 34, 411-433

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