Documente Academic
Documente Profesional
Documente Cultură
1
Dr. Gurdeep Chawla, National University, California (The Journal of American Academy of
Business, Cambridge). 2Abdulrahman Ali Al-Twaijry, Qassim University, Saudi Arabia (The Journal
of Risk Finance)
INTRODUCTION
Some financial analysts feel that the consideration of a dividend policy is irrelevant because
investors have the ability to create "homemade" dividends. These analysts claimed that this
income is achieved by individuals adjusting their personal portfolios to reflect their own
preferences (http://www.investopedia.com/articles/03/011703). For example, investors
looking for a steady stream of income are more likely to invest in bonds (in which interest
payments don't change), rather than a dividend-paying stock (in which value can fluctuate).
Because their interest payments won't change, those who own bonds don't care about a
particular company's dividend policy but again what about those investors who interested in
dividend-paying stock.
Determining dividend policy has been one of the most difficult challenges facing by financial
economist. Somehow, we have not yet completely understand the factors that influence
dividend policy and the manner in which these factors interact. This journal summary will
review two journals on the issues of dividend policy decision and also dividend policy and
payout ratio.
The study on dividend policy decision according to Dr. Gurdep Chawala of National
University, California highlighted that dividend theories such as MM proposition, tax
preference, and bird-in-the-hand theories have presented wide ranging arguments from
dividend irrelevance to low dividends to high dividends. The argument is elaborate further on
the dividend theory as stated below.
MM Proposition Theory
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dividends by selling their stock and their arguments are valid under
restrictive assumptions which include : no personal or corporate income
taxes, no flotation or transactions costs, investors are indifferent between
dividends and capital gains, companies’ dividend policies and capital
budgeting decisions are independent and availability of symmetric (or
same) information to investors and managers. Somehow, MM proposition
has been challenged because of its unrealistic assumptions.
Bird-in-The-Hand Theory
According to Dr. Gurdeep Chawla, MM have called Gordon and Lintner’s theory
“bird-in-the-hand” fallacy and acknowledged that stock prices increase as
a result of more than expected increase in dividends. They have claimed
that, companies are usually reluctant to cut dividends and, therefore, an
increase in dividends indicates managers’ expectations about increased
earnings, increased cash flows, and better company performance in
future.
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company more or less appealing to different types of investors, impact
demand for its securities, and lead to change in stock prices.
Although dividend theories can provide helpful tools for making dividend
policy decisions and dividend policies can be useful guidelines, they do not
explain managers’ views in developing dividend policies. Listed below are
the summary of survey finding which conducted by researcher from
various listed company related to dividend policy.
a) Survey No. 1
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hand argument)
b) Important factors in making decision about
dividend policy
a) Highlighted that, respondent gave the strongest
support for signalling explanation for paying
dividends but expressed little or no support for tax
preference and agency cost explanation. Most
Findings
respondent disagreed with statements supporting
:
the bird-in-hand explanation for paying dividends.
b) Past dividends was the most important factor followed by
stability of earning, the level of current earning and the fourth
most important factors is the expected future earning.
b) Survey No.2
c) Survey No.3
d) Survey No. 4
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Researcher Pruitt and Gitman
:
Respondent Highest ranking financial officer of 1000 largest
: companies in the USA
Survey Focus Factors influencing dividend policy
:
Findings Current and last year’s profit, variability of earnings and growth rate in
: earning strongly influence companies’ dividend policy.
e) Survey No.5
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• The company’s level of leverage has a negative (sometimes
significantly) relationship with the POR.
• The strongest determiner of the POR is its past ratios.
• Comparison analysis revealed that cash per share has a significant
positive impact not only on DPS but also on POR.
• Dividend policy and payout ratio 361 of mean comparisons suggests
that shares with higher book values receive significantly more
dividends, and that the POR is significantly higher for those shares.
CONCLUSION
Finding from both of the journal which discussing on dividend policy decision and dividend
policy payout ration stated clearly that empirical research has been inconclusively and does
not validate dividend theory but somehow it is important for managers to understand the
argument and factors that can help the managers in formulating dividend policy. As stated in
the research finding by Dr.Gurdeep Chawla, the pattern of past dividends, the stability of
earnings, current and expected future earning, concern about impact on stock prices and the
stability of cash flows actually some of the factor that determining the companies’ policy.
On the payout ratio, Abdulrahman Ali Al-Twaijry findings emphasis that payout ratios (POR)
were not found to have strong effect on the company’s future earning growth but significantly
have negative correlation with company’s leverage. It is also noted that cash per share and
share book value significantly positively affecting DPS and POR.
REFERENCES
Abdulrahman Ali Al-Twaijry, Qassim University, Saudi Arabia (The Journal of Risk Finance)
Dr. Gurdeep Chawla, National University, California (The Journal of American Academy of
Business, Cambridge
http://www.investopedia.com/articles/03/011703
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