This document discusses factors that affect a company's dividend decision. It identifies 11 key factors: legal provisions, magnitude of earnings, shareholders' desires, industry nature, company age, taxation policy, control factors, liquidity position, future requirements, agency costs, and business risk. These factors influence a company's ability to pay dividends and how much it should pay out versus retaining earnings. The document also briefly outlines relevance and irrelevance theories of dividend decisions.
determinants of corporate dividend policyArfan Afzal
Determinants of Corporate Dividends Policy: Evidence from an Emerging Economy, the attributes of non-financial companies listed on Abu Dhabi Securities Exchange (ADX). panel data for the period between 2010 and 2012 were collected from the listed companies annual reports published on ADX website.
determinants of corporate dividend policyArfan Afzal
Determinants of Corporate Dividends Policy: Evidence from an Emerging Economy, the attributes of non-financial companies listed on Abu Dhabi Securities Exchange (ADX). panel data for the period between 2010 and 2012 were collected from the listed companies annual reports published on ADX website.
This ppt is prepared to make familiar with the dividend policy which includes Types of Dividend policy, Procedure for declaring dividend, Why do companies declare dividend
This ppt is prepared to make familiar with the dividend policy which includes Types of Dividend policy, Procedure for declaring dividend, Why do companies declare dividend
What Is a Dividend and How Do They Work?pickright46
Dividends are a fundamental aspect of investing that plays a crucial role in the financial landscape. This comprehensive guide aims to cover the concept of dividends, exploring how they work, their significance for investors, and factors influencing dividend payouts.
Dividend Policies involve the decisions, whether-
To retain earnings for capital investment and other purposes; or
To distribute earnings in the form of dividend among shareholders; or
To retain some earning and to distribute remaining earnings to shareholders.
The dividend policies of an organization have a significant bearing on the market value of stocks. Companies must distribute dividends in line with the industry standards and previously distributed dividends by the company. The shareholders will otherwise perceive this variability negatively. It casts suspicion on the financial health and motives of the management (signaling effect). In aggregate, an inefficient dividend decision mechanism would adversely impact the valuation of the company.
Table of Contents
What are Dividend Decisions?
Impact of Dividend Decisions on Price
Factors affecting Dividend Decisions
Cash Requirement
Evaluation of Price Sensitivity
Stage of Growth
Good Dividend Policy
Importance of Dividend Decisions
Q. How much Dividend should a Company Distribute to its Shareholders?
Q. What will be the Impact of Dividend Decisions on the Share Prices of the Company?
Q. What is the Consequential Impact of Inability to Maintain Dividend Year after Year?
Types of Dividend Decision
Stable Dividends
Constant Dividends
Alternate Dividend Decisions
Factors affecting Dividend Decisions
Cash Requirement
The financial manager must take into account the capital fund requirements while framing a dividend policy. Generous distribution of dividends in capital-intensive periods may put the company in financial distress.
Evaluation of Price Sensitivity
Companies chosen by investors for their regularity of dividends must have a more stringent dividend policy than others. It becomes essential for such companies to take effective dividend decisions for maintaining stock prices.
Stage of Growth
Dividend decisions must be in line with the stage of the company- infancy, growth, maturity & decline. Each stage undergoes different conditions and therefore calls for different dividend decisions.
Good Dividend Policy
What Constitutes a Good Dividend Policy?
There does not exist a single dividend decision process that works for every organization. A decision suitable for one company may prove fatal for another company. For example, businesses with a consistent order book such as telecom and banking are expected to pay regular dividends. It may impact the stock prices if they do not pay dividends regularly. On the contrary, sectors of pharmaceutical and technology are highly research-oriented. These require huge cash expenses to further their operations. Therefore they cannot afford to pay a regular dividend. Investors of such stocks earn income mainly through capital appreciation. In essence, there are a lot of factors affecting dividend policy or decisions.
We can refer to the following renowned theories on Dividend Policy:
Modigliani- Miller Theory on Dividend Policy
Gordon’s Theory on Dividend Policy
Walter’s Theory on Dividend Policy
A good financial manager must, therefore, answer the following questions before taking crucial dividend decisions
Importance of Dividend Decisions
While deciding the distribution of dividends, management has to answe
Debt and equity are the two important sources of finance for the firms. Basically, capital structure of the firm revolves around the judicious mix of the debt and equity. Upon Debt and equity mix much research has been done and many have designed the capital structure in a very different manner.
Capital structure theory can be said as the manner in which a company or organization finance its economic activities. Basically, capital structure of a firm is the combination of equity and debt. It is a very important decision for every organization or business house. This decision revolves around a question “How to make an optimal capital’s structure for the firm?” and what are the factors that influence the decision. Because the capital structure decision ultimately affects the management, investors and lenders. So, it becomes very crucial for the firms. Earlier many researchers have made investigation on the capital structure determinants but still there are loopholes to be filled up. The theory of Capital Structure began with the phenomenal work made by Modigliani and Miller (1958, 1963). It stirred the academic world to pour more thoughts into that and many interesting works came out.
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DETERMINANTS OF CAPITAL STRUCTURE:
The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm change over a period of time.
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2. INTRODUCTION
The dividend decision is taken after due considerations to number of factors like legal as
well as financial. This is so because one set of dividend policy cannot be evolved that can be
applied to all firms rather the dividend decision vary from firm to firm in light of the firm
specific considerations.
Dividend Policy:
3. Factors Affecting Dividend Decision:
Theoretically, over the past number of years, it has been believed by the academicians that
the dividend decision is influenced by number of factors. Some of the factors that affect the
dividend decision of a firm are listed as follows:
1. Legal Provisions: Indian Companies Act, 1956 has given the guidelines regarding
legal provisions as to dividends. Such guidelines are required to be followed by the
companies whenever the dividend policy is to be formulated. As per the guidelines, a
company is required to transfer a certain percentage of profits to reserves in case the
dividend to be paid is more than 10 percent. Further, a company is also required to
pay dividend only in cash but only with the exception of bonus shares.
2. Magnitude of Earnings: Another important aspect of dividend policy is the extent
of company’s earnings. It serves as the introductory point for framing the dividend
policy. This is so because a company can pay dividends either from the current
year’s profit or the past year’s profit. So, if the profits of a company increase, it will
directly influence the dividend declaration as the latter may also increase. Thus, the
dividend is directly linked with the availability of the earnings with the company.
3. Desire of Shareholders: The decision to declare the dividends is taken by Board
of Directors but they are also required to consider the desire of the shareholders,
which depend on the latter’s economic condition. The shareholders, who are
4. economically weak, prefer regular dividend policy while the rich shareholders may
prefer capital gains as compared to dividends. However, it is very difficult for the
board to reconcile the conflicting interests of different shareholders yet the dividend
policy has to be framed keeping in view the interest of all the interested parties.
4. Nature of Industry: The nature of industry in which a company is operating,
influences the dividend decision. Like the industries with stable demand throughout
the year are in a position to have stable earnings, thus, should have the stable
dividend policy and vice-versa.
5. Age of the Company: A company’s age also determine the quantum of profits to
be declared as dividends. A new company should restrict itself to lower dividend
payment due to saving funds for the expansion and growth as compared to the
already existing companies who can pay more dividends. Grullon et al. (2002)
suggested that as firms mature, they experience a contraction in their growth which
results in a decline in their capital expenditures. Consequently, these firms have
more free cash flow to pay as dividends. Similarly, Brav et al. (2005) suggested that
more mature firms are more likely to pay dividends. In contrast, younger firms need
to build up reserves to finance the future growth opportunities, thus, making them
to retain the earnings.
6. Taxation Policy: The tax policy of a country also influences the dividend policy of
a company. The rate of tax directly influences the amount of profits available to the
company for declaring dividends.
7. Control Factor: Yet another factor determining dividend policy is the threat to lose
control. If a company declares high rate of dividend, then there is the possibility that
a company may face liquidity crunch for which it has to issue new shares, resulting
in dilution of control. Keeping this threat in view, a company may go for lower level
of dividend payments and more ploughing back of profits in order to avoid any such
threat.
8. Liquidity Position: A company’s liquidity position also determines the level of
dividend. If a company does not have sufficient cash resources to make dividend
payment, then it may go for issue of bonus shares.
5. 9. Future Requirements: A company while faming dividend policy should also
consider its future plans. If it foresees some profitable investment opportunities in
near future then it may go for lower dividend and vice-versa.
10.Agency Costs: The separation of ownership and control results in agency problems.
Agency costs can be reduced by distributing. In this stratum, dividends are paid out
to stockholders in order to prevent managers from building unnecessary empires to
be used in their own interest. In addition, dividends reduce the size of internally
generated funds available to managers, forcing them to go to the capital market to
obtain external funds. As explained in Rozeff (1982), firms with a larger percentage
of outside equity holdings are subject to higher agency costs. The more widely
spread is the ownership structure, the more acute the free rider problem and the
greater the need for outside monitoring. Hence, these firms should pay more
dividends to control the impact of widespread ownership.
11.Business Risk: Business risk is a potential factor that may affect dividend policy.
High levels of business risk make the relationship between current and expected
future profitability less certain. Consequently, it is expected that firms with higher
levels of business risk will have lower dividend payments. Many researchers argued
that the uncertainty of a firm’s earnings may lead it to pay lower dividends because
volatile earnings materially increase the risk of default. In addition, field studies
using survey data reported compelling evidence that risk can affect dividend policy.
In these surveys, managers explicitly cited risk as a factor that influences their
dividend choice.