Are Theories of Dividend Payment Applicable in the Real World Essay

Are Theories of Dividend Payment Applicable in the Real World Essay

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Dividends are the distribution of profits in the company. It depends on the type of dividend policy made by companies. Dividend policy will affect the behaviours and attitudes of investors towards the company. Many economists or financial experts have constructed different theories to interpret the effects of a dividend policy to the society. But these theories are contestable since they are not tested in the real world. Managers’ decision on determining the size and time of a company’s next dividend payment is also important for both companies and shareholders. They will affect the company to distribute an appropriate amount of dividends in a right time. This essay will discuss whether theories of dividend payment, such as the dividend irrelevance and signalling effects are applicable in the real world. It will then describe some key factors that managers should consider on deciding the time and size of a company’s next dividend payment. Finally, it will conclude with the significance of a company’s decision on dividend payments.

Discussion of availability of theories in real world
Many theories such as the dividend irrelevance, tax and clientele effects and information content and signalling effects are controversial in financial studies. Economists often argue whether they are applicable and reliable in reality. Miller and Modigliani’s (1961) dividend irrelevance theory would be the typical one. MM suggested shareholders are indifferent with the changes of dividend policy in the company. The dividend policy of a firm will not affect the present value of its shares and shareholder’s wealth. A firm’s value depends on the profitability of its assets and its investment projects but not how it is “packaged for distrib...

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...tion of Incomes of Corporations Among Dividens, Retained Earnings, and Taxes. The American Journal Review, 46(2), pp. 97-113.

Mackenzie, M., 2012. US investors fret over dividend tax. Financial Times, [online] November, 12, 2012. Available at: [Accessed 15/5/2014].

Miller, M.H. and Modigliani, F., 1961., Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), pp. 411-433.

Naser, K., Nuseibeh, R. and Rashed, W., 2013. Managers' perception of dividend policy: Evidence from companies listed on Abu Dhabi Securities Exchange. Issues in Business Management and Economics, 1(1), pp. 001-012.
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.

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