THE DIVIDEND DECISION IS UNIMPORTANT TO THE WELLBEING OF A COMAPNY

The dividend decision is unimportant to the wellbeing of a company



The dividend decision is unimportant to the wellbeing of a company

Introduction

One of the most discussed issues with respect to company's responsibility towards its shareholders is of taking dividend payout decisions. Companies usually have to decide the form of payment. It could be repurchase of shares from shareholders or disbursement of dividends. These decisions also depend on the cost associated to dividend payments and undertake tax perspectives as well. All of these decisions are part of firm's payout policy. These decisions are taken out to be carefully. Many theorists and analysts have presented renowned theories to address the insignificance and significance of dividend payout. These theories include Gordon, Lintner, and Miller and Modigilani. It has become a controversial issue till today. Researchers like Black in 1976 conducted detailed study and found that there is no explanation that supports dividend payout (pp. 5-8). There has been conflict among researchers and authors pertaining to the irrelevance of dividend decisions. It is considered a s puzzle for countries like USA where dividends have been heavily taxed as compare to capital gains. The researchers like Elton and Grober also mentioned in their research that there is no particular logical reason behind why firms pay dividends (1970, pp. 68-74)

Discussion

The amount involved in dividends is huge for larger corporations; therefore, this decision must be taken seriously. For instance, a company spent around $355 billion in paying off dividends and more than $400 billion in repurchasing its dividends in 1999. The design of dividend policy is an important decision due to the significant amount of money involved in it and repetitive nature of the decision. In addition, it has a significant impact on the relationship between stakeholders and company.

The theories of capital structure, mergers and acquisitions, asset pricing middles and capital budgeting explain why firms pay dividends. Some empirical studies confirming the reasons in favour of payout policies are listed below:

Larger corporations pay dividends out of their earnings.

The dividend payment was considered as the main source of payout and repurchase was considered as relatively less used in 1980s.

The firms that trade publically in USA are fond to be paying less dividends after 1980s.

Heavy taxes are imposed on dividend payout.

Repurchase of shares is more volatile than cash dividends.

There a positive reaction of market towards announcements related to repurchase of shares or payment of cash dividends.

(Allen and Michaely, 2002, pp. 3-148)

Earlier, financial economists used to believe that if a firm pays high dividend then the overall value of firm's stock shall appreciate. However, this concept was challenged by the theory presented by Miller and Modigliani in 1961. The earlier views of dividends were based on discount dividend model, which was used to evaluate the value of firm by sing the following formula:

V = D / (1+r)^t

Where, D is dividend at time t

r is opportunity cost of capital at time t

The Gordon's theory raised a concern that the ...