Determinants of Dividend Policy
Introduction on Dividend policy:
In any corporate finance would, it is essential to determine two of the most important aspects those are related with operational decision that are helpful for finance managers to deal with all kind of financial issues. The capital budgeting and operational decision making are vital aspects that are needed to be taken into consideration while making any critical decisions. All those decision making which are being done by management would be relate with assets that a firm use to acquire. While in case of financial decision that entire focus is make on appropriate measure to finance those assets. At the time, company starts producing profits they need to make another decision can be arises which is related with the distribution of profits in between various shareholders or investors that are close partners of an organisation.
According to Hussainey, Oscar Mgbame and Chijoke-Mgbame, (2011), dividend policy which is related with distribution of cash or shares to different shareholder over the period of time. This has been seen that all level of equity would be kept as retained earning in the company which is affected because of dividend decision. At the time of distribution, financial managers always keep control about all selection process of divided policies. It can impact wealth of companies and most effectively, the wealth of the stakeholders.
In the opinion of Al-Shubiri, (2011) various dividend policy will be analyse in recent past time between financial economists. Apart from this, plenty of studies have been carried out to resolve the queries associated with dividend plans, but it remain unsolved. Because of wide range of analysis about dividend policy, a valuable amount of literature will grows in nowadays. According this particular chapter which aims to reviews early literature on corporate determinants of dividend policy and that are related with theoretical aspects. It has been summaries under this project which is based certain hypothesis of present evaluation.
Over the past few years, there are mainly four important topics that are have been evaluated in dividend policy literature. The primary manner of analysing dividend payout, certain relevancy of dividends, inter-nation comparison in company's total distribution of dividend in and disappearing dividends in emerging market. In the word of Arif and Akbarshah, (2013)there are basically three methods that are being found for establishing setting of dividend policy between various companies. Initially, there are certain companies that target long term payout ratios in order to determine dividend payout as total percentage of earning. Secondly, some of them are having stable dividend payment over the period of time as they believe according to the perception of various investors and stakeholders. Lastly, few managers will consider certain changes as per the level of dividend payout which depend significantly on variable data to close investors.
From the managers point of views Leary and Michaely, (2011) the present rate of dividend payouts is basically helpful as a benchmark to fix dividend policy rates. Thus, changes in specific rate of dividend in companies which means that financial policy of them are having specific aspects about variation to reduce dividends. But other will decide not to pay dividend at the rate shareholder are demanding. As Agyei and Marfo-Yiadom, (2011) changing dividend policy determine modification in total companies earnings. companies with valuable and stable rate of dividend policy are more supportive and reliable to preferred as investors and managers. On the other hand, as omitting dividend would have low impacts to market which they are conveys information about financial distress. This has been observed that finance manager or accountant are mainly unwilling to omit or reduce dividends that are discussed by Kent Baker and Powell, (2012).
Dividend policy theories
Under this particular sectors which is analyse by taking effective theories and methods those are associated with dividend policy. It consists of dividend irrelevance hypothesis and valuable theories such as Bird in hand theory as well as tax preference theory.
Dividend irrelevance theory
According to this particular theory those are working on capital structure irrelevance proposition, MM (Modigliani and miller) which is having no taxes and bankruptcy expenses. It means that there is no any effect from dividends on companies capital structure or stock prices during the time. As per the MM model, in a perfect market situation the share price of companies and shareholder wealth is not going to affect through using dividend policy. Henceforth, they think that total value of organization is examine through its total investment decisions. In order words, the total value of companies is said to be independent of total set of dividend policy. There are certain assumption of a perfect capital market that MM is based on this particular theory are discuss underneath
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