The harder we look at the dividend image, the more it seems like a mystifier, with pieces that merely do n’t suit together. ”
The policy a company uses to make up one’s mind how much it will pay out to stockholders in dividends or sum of a dividend that a publically traded company decides to pay out to stockholders. Dividend policy can be of two types: managed and residuary. The residuary dividend policy is the sum that left after doing investment.By paying dividend value of portion increases thta ‘s why directors should follow best policies.Dividend policy maximizes the stock monetary value that maximize house value. Dividend determinations are problematic issue whether or non it contributes to the value of house. There are three types of dividend such as hard currency dividend, stock split and stock dividend. Cash dividend has some extensions like Regular hard currency dividend is hard currency payments made straight to shareholders normally each one-fourth. Excess hard currency dividend is gestural that the excess sum may non be repeated in the hereafter. Particular hard currency dividend is similar to excess dividend but surely will non be repeated. Neutralizing dividend is some or all of the concern has been sold. There is an option of hard currency dividend that is stock redemption ; Company buys back its ain portions of stock. Tender offer is company states a purchase monetary value and a coveted figure of portions. Open market is buys stock in the unfastened market. Similar to a hard currency dividend in that it returns hard currency from the house to the shareholders. Stock dividend is retained net incomes transferred to par value and capital histories. Stock split is par value adjusted to reflect the split with no consequence on maintained net incomes.
This is another statement for dividend policy irrelevancy in the absence of revenue enhancements or other imperfectnesss. The inquiry arises in head is dividend affair or non? Its reply is future dividends.MM theory suggests dividend policy does non consequence onperformance of house as discussed in Dividend patronage, signaling attack. The inquiry about perfect capital market loosely debated and most powerful statement towards the impact of dividends was presented by Modigliani and Miller ( 1961 ) , stated that under perfect capital markets without any revenue enhancements, dealing costs and other market imperfectnesss the company value is independent of the dividend policy. Alternatively the house value is entirely depended of the gaining power of the company assets and its investing policy and how its net incomes are distributed to stockholders. If this would go on no companies would pay dividends since it does non make any extra value for the stockholders and no farther research sing dividends would be necessary. This is opposite to the position of Brawley ( 2008 ) who has written in undergraduate text editions in corporate finance, he narrate that the dividend payout statement is unresolved jobs in corporate finance and farther research within the country is critical and we have to increase understanding about it.Free hard currency flow will be used as it reveals the sum of hard currency that is available for stockholders and creditors after all disbursals has been paid. Previous surveies concluded that free there is positive relation between free hard currency flow and dividend payout ratio and this can be explained by the bureau theory of free hard currency flow. Jensen ( 1896 ) concluded that companies that have high free hard currency flow have to pay higher dividends to cut down the bureau struggle between directors and stockholders. Another factor is the growing rate of the company. Several surveies ( Josef 1982 ) , ( Lloyd 1985 ) , ( Holder 1998 ) have concluded that there is a negative relationship between the growing rate of the company and the dividend payout ratio. The bulk of the old researches used growing in gross revenues in order to mensurate the growing rate. In this research we will utilize the growing in gross revenues in order to mensurate the growing rate of the company. Majority of the surveies have used gross revenues to mensurate growing rate and they used the informations in different ways. Daunfeld ( 2009 ) used the market to book value in order to mensurate the growing chances and his determination is that a higher market to book value indicates better growing chances. The justification for the negative relationship between the dividend payout ratio and growing is that turning companies have to finance increased investings by maintained net incomes. ( Josef 1982 ) ( Lloyd 1985 ) . Companies with lower growing rates have lower investing outgos and higher degree of maintained net incomes. These companies should pay high dividends in order to cut down bureau cost between director and stockholder ( Jensen 1986 ) . Leverage is the cardinal indexs of a company ‘s fiscal wellness it is non a usually used to prove the relationship with the dividend payout ratio. Earlier surveies concluded that purchase have non provided a standardised image that shows that either purchase has an impact on the company ‘s dividend payouts or non? Al Shabibi & A ; Ramesh ( 2011 ) conduct a research in United Kingdom and they found no important relationship between the purchase and the companies dividend payouts. There is contradiction between both surveies made by Al Shabibi & A ; Ramesh and Al-Kuwari ( 2009 ) who found a strong negative correlativity between purchase and the dividend payout ratio. Harmonizing to Werner and Jones ( 2003 ) debt to equity ratio indicate in which proportions the company is financed by creditors relative to stockholders. we decided to utilize the debt to equity ratio as a measuring of purchase Most earlier surveies found a positive relationship between net income and the company ‘s dividend payouts. There are besides different measurings used to mensurate net income. Gill ( 2006 ) and Amado & A ; Ebor ( 2006 ) used EBIT/Total assets to gain. Another method used in old research to mensurate net income is the return on equity ( ROE ) by ( Al-Kowari 2009 ) . Al-Kowari ( 2009 ) province that ROE is one of the best measurings of the company ‘s net income because it reveal the capacity of internally bring forthing hard currency. Assorted surveies conducted to find the relationship between the hazard of companies and the dividend payout ratio. Holder ( 1998 ) used the standard divergence of the return to mensurate the hazard of the stock. Another survey made to mensurate hazard by utilizing discrepancy in hard currency flow ( Amado & A ; Ebor 2006. Some old surveies have used beta as a measuring of the company ‘s market hazard ( Josef 1982 ) ( Lloyd et.al ( 1985 ) ( Al-Kowari 2009 ) .
Many old surveies found that there exist strong negative relationship between the degree of peril and dividend payout ratio ( Josef 1982 ) ( Lloyd et.al 1985 ) . Previous surveies have concluded that riskier houses have higher volatility in their hard currency flows which makes it more hard to be after for future investings. This in bend contributes to that the demand for external funding additions. ( Josef 1982 ) ( Al-Kowari 2009 ) ( Al- Shubiri 2011 ) province the harmonizing to the picking order theory, external funding is more expensive and companies hence choose to diminish their dividend payouts in order to avoid more expensive external funding. Assorted research workers ( Lloyd et.al 1985 ) ( Holder et.al 1998 ) ( Heidenstam & A ; Rabble 2006 ) have argued that the size of the company is factors the largest influence on the dividend payout ratio. One of the first surveies to integrate the company size as a factor when finding the relationship with dividends was Lloyd et.al ( 1985 ) . They argued that big houses have to pay higher dividends in order to cut down bureau costs because big companies have more varied stockholders.
Overview of different theories:
The harder we look at dividend the more it seems like a mystifier with pieces that merely do non suit together ” .
MM theory says under perfect capital market the company ‘s dividend payout policies do non impact the value of a company. Assorted researches conducted in order to prove the cogency of Modigliani and Miller ‘s propositions, some accept it but non accepted by all. Black and Scholes ( 1974 ) back up the consequences of Modigliani and Miller sand concluded that companies are capable to set dividend with investor revenue enhancement induced penchant so at that place exist no relation between dividend and stock return. Miller and Scholes ( 1978 ) besides supports the dividend irrelevancy theory and they province that revenue enhancement rate for dividends and capital additions are different but do non impact the value of the company. The residuary theory of dividend policy says that the house will merely pay dividends from residuary net incomes, net incomes more than after all investing chances.
The Bird in the Hand Theory:
This theory decision is that Dividend payments affect the value of the house and investors are willing to pay a premium monetary value for stocks that pay dividends. A higher grade of uncertainness is connected to capital additions and dividends paid in the hereafter compared to current capital additions and dividends. Investors use a higher price reduction rate in order to dismiss net incomes for companies who non pay current dividends.
Bird in manus theory says that there is relationship between house value and dividend payout. It states that dividends are less hazardous than capital additions. Investors would prefer dividends to capital additions ( Amidu, 2007 ) as dividends are less hazardous than capital additions and houses should put a high dividend payout ratio and offer a high dividend output to maximise stock monetary value. As name of theory shows that under perfect capital markets the dividend policy is independent to the value of house and it does non count whether the companies have high or low dividend payouts. Modigliani and Miller theory better define capital market that is no 1 on the market is big plenty to impact the market monetary value of a security and everyone has entree to the same costless information. In Rational behaviour all histrion on the market prefer more wealth to less is it does non count whether he receives the addition in wealth in the signifier of capital additions from the stocks or dividend payments. Perfect certainty have the same information and cognize the return of every security in the hereafter and it is possible to do the guess that there exists merely one type of security which Modigliani and Miller refer to as stocks. The bird in manus theory opposes Modigliani and Miller ‘s dividend irrelevancy theory and says that companies with higher net incomes pay higher dividends to its stockholders. Since this is the antonym of Modigliani and Miller ‘s it would be interesting to prove whether companies with a higher net income wage higher dividends to its stockholder. Profitableness is gaining generated by company, it indicate valley of house. Dividends are of import to stockholders and possible investors because they the earning generated by company. Typically directors try to maintain a stable and turning dividend and do non desire to diminish the dividends till it demo negative signal. But in instance of catastrophe some addition dividend and some lessening, largely big companies decreased their dividends but other maintain it.
The signaling theory:
The account of signaling theory is given by Bhattacharya ( 1980 ) and John
Williams ( 1985 ) dividends disperse information asymmetric between directors and stockholders by presenting inside information of house hereafter chances and dividend should be paid to stockholders harmonizing to the monetary values of stocks. Another statement given by Miller and Rock ( 1985 ) they province that dividends provide a signal to investors that the company ‘s profitableness will increase or diminish in close hereafter and company growing is of import determiner of the dividend payouts. The foundation of this theory lead by Lintner ‘s ( 1956 ) survey and say that the monetary value of a company ‘s stocks alterations as the dividend payments alterations. Modigliani and Miller ( 1961 ) argue in favour of the dividend irrelevancy he besides declared that in the existent universe of perfect capital markets dividend provides a information content ” which may impact the market monetary value of the stock. Many research workers developed the signaling theory and now it is most powerful dividend theory.
Bhattacharya ( 1979 ) presented most sanctioned survey about signaling theory that is dividends play a function of signal of expected future hard currency flows. An addition in the dividends indicates that the directors expect higher hard currency flows in the hereafter. Outside investors have flawed information about the company ‘s future hard currency flows and capital additions and dividends are taxed at a higher rate as compared to capital additions. Bhattacharya ( 1979 ) argue that harmonizing to these conditions even there is a revenue enhancement disadvantage for dividends, companies pay dividends to stockholder and investors in order to direct positive signals.
Baker ( 2009 ) states that a company ‘s beginnings of information such as accounting informations and future chance studies are non wholly dependable. These sorts of information do non to the full stand for a company ‘s profitable concern chances in the hereafter. Given that outside investors have imperfect information sing the house ‘s net income chances, the company has to happen other ways in order to convert outside investors about future hard currency flows and net incomes. Therefore positive signals such as increasing dividends provide a positive mark to outside investors. Even though dividends have a higher revenue enhancement rate as comparison to capital additions, investors are willing to pay a higher revenue enhancement rate for dividends in exchange for the positive signal dividends send sing that the value of the stocks. As a consequence of the signaling theory dividends are able to change over incompetent markets to perfect markets with full information efficiency.
There are two major factors that affect the bureau costs, monitoring costs and the directors risk antipathy penchants. Agency costs can be concentrated by paying dividend to stockholder. The bureau costs addition as the free hard currency flow additions and directors hence have to pay inordinate free hard currency flows as dividends. Jenson and Mecklings ( 1976 ) states that bureau costs links with the other fiscal activities of a house. Easterbrook ( 1984 ) says that houses pay out dividends in order to cut down bureau costs. Dividend payout keeps houses in the capital market, where monitoring of directors is available at lower cost. If a house has free hard currency flows Jensen ( 1986 ) it is better off sharing them with shareholders as dividend payout to avoid struggle between director and stockholder and negative NPV. Easterbrook ( 1984 ) given the farther account sing bureau cost job and said that there are two signifiers of bureau cost one is the cost monitoring and other on is cost of hazard antipathy on the portion of managers or directors. Jensen states that this is due to the bureau costs connected to liberate hard currency flows and stockholders prefer hard currency payments in the signifier of dividends instead than to maintain the free hard currency flow within the company. Most powerful surveies about bureau costs were offered by Esterbrook ( 1984 ) obtainable another survey about bureau costs and his consequence ropes the findings made by Rozeff ( 1982 ) and Jensen ( 1976 ) . Easterbrook conducted a survey about dividend payments can be used in order to minimise the bureau costs between directors and investors. Easterbrook province two factors affect the bureau costs in a company, monitoring costs and the hazard antipathy penchants of directors. The monitoring cost refers to the costs incurred by the stockholders in order to oversee the directors and forestall them from following their ain personal docket alternatively of maximising the value of the stockholders equity. The 2nd beginning of bureau costs is the hazard antipathy penchants of directors. The job arises because most stockholders have diversified portfolios and they are interested in systematic hazard which can non be eliminated through variegation. In contrast to stockholders, directors normally have a big sum of their personal wealth connected to the company. Therefore if the company is unprofitable or even goes insolvents, the directors ‘ personal wealth becomes to a great extent affected. The directors will as a consequence be more hazard averse compared to the stockholders and they may reject possible high value undertaking due to their hazard antipathy penchants. Harmonizing to Easterbrook ( 1984 ) these two beginnings of bureau cost can be reduced by paying dividends to stockholders. However, Easterbrook farther states that dividends are worthless in themselves and companies should therefore lone wage dividends in order to cut down bureau struggles. Dividends should harmonizing to Easterbrook ( 1984 ) be affected by unexpected alterations in net incomes and we have hence incorporated net incomes among the company selected factors that we are traveling to utilize in the research.
Another theory that explains the bureau cost is the free hard currency flow theory by Jensen ( 1986 ) . Jensen argues that the bureau costs arise as the free hard currency flow additions. Because the stockholders have to increase the supervising in order to forestall the directors from prosecuting in inordinate disbursement or unprofitable investings, such as imperium edifice. This can be explained by the positive correlativity between the size of the company and the numbering program of direction ( Murphy, 1985 ) . The bureau cost theory suggests that, dividend policy is determined by bureau costs originating from the divergency of ownership and control. Directors may non ever follow a dividend policy that is value-maximizing for stockholders but would take a dividend policy that maximizes their ain private benefits. Making dividend payouts which reduces the free hard currency flows available to the directors would therefore guarantee that directors maximize stockholders ‘ wealth instead than utilizing the financess for their private benefits ( DeAngelo et al. , 2006
Life rhythm theory:
This theory given by the Lease ( 2000 ) and Fama and French ( 2001 ) the determination of their research is that houses should follow a life rhythm and reflect direction ‘s appraisal of the importance of market imperfectness and factors including revenue enhancements to equity holders, bureau cost asymmetric information, drifting cost and dealing costs. Miller and Scholes ( 1978 ) give the elaborate account based on the consequence of revenue enhancement penchants on patronages and reason different revenue enhancement rates on dividends and capital addition lead to different patronages. Miller and Modigliani ( 1961 ) given the theory known as MM theory and clearly explained that in perfect markets, dividend
do n’t consequence houses value. Stockholders are non concerned to having their hard currency flows as dividend or in form of capital addition, every bit for as house ‘s does n’t alter the investing policies. In this type of state of affairs house ‘s dividend payout ratio consequence their residuary free hard currency flows and the consequence is when the free hard currency flow is positive houses decide to pay dividend and if negative house ‘s decide to publish portions. They besides conclude that alteration in dividend may be conveying the information to the market about house ‘s future net incomes.
This survey examined the bureau cost theory, signaling theory, Bird in manus theory and MM proposition. The findings are that troughs are really unwilling to cut dividends once they are initiated. This unwillingness leads to dividends that are gluey, smoothed from twelvemonth to twelvemonth and tied to hanker run profitableness of the house. The consequences indicate that size, profitableness, hard currency flow, growing and hazard have an impact on the companies ‘ dividend payout ratios. The size is the extremely negative that show the houses invest in their assets instead than paying dividends to its stockholder. There was a positive relationship between dividends and net income and revenue enhancement and negative relationship between dividends and growing. A negative relationship between systematic hazard and net incomes variableness portray that higher the net incomes variableness lower will be dividend paid by the companies. The consequences besides highlight that advertizer retention is positively related to dividend payout. The consequences besides show that there is a negative relationship between growing and investing Opportunities and dividend payout ratio. However, some of the most successful companies during the last old ages such as Apple and Google have chosen non to pay dividend. This indicates that it is possible to be successful without paying dividends.