Dividend Policy Summary

Summary #9

Dividends come in many forms, including cash dividends, stock dividends, and extra dividends. There are also dividend-like payments such as stock splits and share repurchases. Studies have shown that managers have a target dividend payout ratio. However to avoid fluctuations in dividend value, mangers smooth the dividend by moving only partway towards the target payout every year. Furthermore, managers look to future cash flows when setting the dividend. Investors know this and interpret a dividend increase as a sign of management optimism.

Summary #9

MM proved that in perfect and efficient capital markets dividend policy is irrelevant. However, there is considerable controversy over the impact of dividend policy in a flawed world. Some groups hold that dividends should be high to maximize firm value.Their argument rests on the information content of such high dividends. Others hold that dividends should be low.Their argument rests on different tax treatment for dividends and capital gains.

Summaer #9

The dividend clientele effect argues that there may be clienteles for high (low) dividends, but that they are already satisfied. Thus changing your firm’s dividend policy may attract a new type of investor, but it will not change the value of your firm. Dividends are interpreted as a signal from management about the future prospects of the firm. If a sharp dividend change is necessary, the firm should provide as much forewarning and explanation as possible.