Literature Review

Literature Review
DEPARTMENT OF
BUSINESS MANAGEMENT

Student Name:
Student Number:
Contact Number:
Email Address:

Amkela Ngwenya
4397-434-1
082 211-5742 [e-mail] SUPERVISOR

JS Kasozi

RESEARCH TOPIC: DETERMINANTS OF CORPORATE DIVIDEND PAYMENT
POLICIES: A CASE OF THE BANKING INDUSTRY IN SOUTH AFRICA

Declaration
I declare that the work I am submitting for assessment contains no section copied in whole or in part from any other source unless explicitly identified in quotation marks and with detailed, complete and accurate referencing.

23 June 2014
Mr. A Ngwenya

Date

TABLE OF CONTENTS
1. Introduction .................................................................................................................... 2
2. Theoretical Body of Knowledge and Empirical Findings .................................................... 3
2.1.

Introduction ........................................................................................................................3

2.2.

Separation of Ownership and Control – The Agency Theory ..................................................3

2.2.1.

Theoretical Foundations ..........................................................................................................................3

2.2.2.

Empirical Examinations and Findings.......................................................................................................4

2.3.

Information Asymmetry – Signaling Theory..........................................................................5

2.3.1.

Theoretical Foundations ..........................................................................................................................5

2.3.2.

Empirical Examinations and Findings.......................................................................................................7

2.4.

Tax and Transaction Costs Inducements – Clientele Effects Theory

References: ividend policy is a critical decision area in corporate finance (Pal & Goyal, 2007). of capital markets (Miller & Modigliani, 1961). Consequently, thorough understanding of the phenomenon by all role players should be of great import Though dividends date back centuries, Lintner’s (1956) seminal paper on the distribution of corporate income appears to have spurred the extent and magnitude of current research studies on the phenomenon. In his study, Lintner (1956) found that managers were generally conservative in setting their dividend policies resulting in fairly conservative and consistent Five years later, in their ground breaking research, Miller and Modiglliani (1961) demonstrate that in perfect markets dividends have no effect on share prices and are thus, irrelevant However, their hypothesis is based on certain assumptions, which, when relaxed, a very different picture emerges (Baker, Powell, & Veit, 2002) conundrum has resulted in a dozen more hypotheses being developed, though none of which has found unequivocal empirical support (Frankfurter & Wood, 2002). INTRODUCTION Modern day financial practice draws heavily on finance theory, (Aggawarl, 1993) theory is very useful to finance decision makers for the insights it provides and its applicability in many important decision areas, (Brigham & Davies, 2009) theoretical concepts may indeed provide many useful insights, practice has however vehemently resisted their suggestions (Baskin, 1988) perform some service on his/her behalf. The arrangement involves delegating some decision making authority to the agent, (Ross, 1973; Jensen & Meckling, 1976) agent are both utility maximisers, it is reasonable to believe that the agent will not always act in the best interest of the principal (Jensen & Meckling, 1976). costly affair, (Jensen, 1986). Shareholder maximising firms attempt to reduce agency costs by incurring a new set of costs which is designed to bond managers to act in the interests of shareholders, (Moh’d, Perry & Rimbey, 1995). These costs fall into two categories; those borne by investors in monitoring the activities and actions of management and those borne by managers in a bid to avoid risk, (Easterbrook, 1986). Risk-averse managers may undertake low risk projects but with lower expected returns, while investors would prefer high return/high risk projects. However, both monitoring and risk-aversion problems are less severe when the firm constantly taps the capital markets for new capital (Easterbrook, 1986).