Oxford Brookes UniversityCorporate Finance ConceptsCritical Literature
Oxford brookes university
Corporate Finance Concepts
Critical literature review and discussion of dividend policy
Prepared by: Quang Vinh Pham
INTRODUCTION
Dividend policy, according to Baker et al. (2001), refers to the payout strategy that corporate directors have to comply with when settling the size and type of cash allotments to their shareholders over time. Therefore, the decision of dividend can influence the amount of earnings distributed against the amount retained and used for reinvestment.
On the other hand, Miller and Modigliani (1961) state that under the assumptions of perfect capital markets, the payment of dividend has no impact on the value of companies as well as the enhancement of shareholders’ wealth and, accordingly, is irrelevant. However, from Kozul and Orsag’ (2012) perspective, in reality, firms operate on markets with such imperfections as taxes, asymmetric information, agency issues and many more. Hence, it questions the applicability of Miller and Modigliani’ thesis in the real world and raises a debate of firms’ motives to pay dividends (Denis and Osobov, 2008).
After recent changes in dividend policies of two big firms namely Apple Inc and Dell Inc, the argument of why firms amend their dividend policies has lured even more concerns of finance researchers. In detail, while Apple began to pay dividend for the first time since 1995 in March 2012, Dell also made their first dividend payment in the same year. These events are considered informative and valuable by both markets and analysts.
This paper discusses the topic of dividend determinants and firms’ tendency to pay dividend.
CRITICAL LITERATURE REVIEW
1. Factors influencing dividend policies
1.1. Agency costs
Following Breuer et al. (2014), agency problems arise as one factor that may have influence on corporate dividend policy. This is in line with the agency theory which claims that the act of paying dividends can mitigate agency issues caused by information asymmetry
Corporate Finance Concepts
Critical literature review and discussion of dividend policy
Prepared by: Quang Vinh Pham
INTRODUCTION
Dividend policy, according to Baker et al. (2001), refers to the payout strategy that corporate directors have to comply with when settling the size and type of cash allotments to their shareholders over time. Therefore, the decision of dividend can influence the amount of earnings distributed against the amount retained and used for reinvestment.
On the other hand, Miller and Modigliani (1961) state that under the assumptions of perfect capital markets, the payment of dividend has no impact on the value of companies as well as the enhancement of shareholders’ wealth and, accordingly, is irrelevant. However, from Kozul and Orsag’ (2012) perspective, in reality, firms operate on markets with such imperfections as taxes, asymmetric information, agency issues and many more. Hence, it questions the applicability of Miller and Modigliani’ thesis in the real world and raises a debate of firms’ motives to pay dividends (Denis and Osobov, 2008).
After recent changes in dividend policies of two big firms namely Apple Inc and Dell Inc, the argument of why firms amend their dividend policies has lured even more concerns of finance researchers. In detail, while Apple began to pay dividend for the first time since 1995 in March 2012, Dell also made their first dividend payment in the same year. These events are considered informative and valuable by both markets and analysts.
This paper discusses the topic of dividend determinants and firms’ tendency to pay dividend.
CRITICAL LITERATURE REVIEW
1. Factors influencing dividend policies
1.1. Agency costs
Following Breuer et al. (2014), agency problems arise as one factor that may have influence on corporate dividend policy. This is in line with the agency theory which claims that the act of paying dividends can mitigate agency issues caused by information asymmetry