Dividend policy irrelevance

Résumé du document

Depending on its life cycle and strategy, a firm has different financial needs. These financial needs could be fulfilled by internal or external resources. The sources of internal financing is cash flows. External financing could be debt and/or equity. When a firm uses debt, the interest rate it pays is the remuneration of the lenders (i.e. banks). In the case of equity it is different, the firm does not have to pay a contractual interest rate. The shareholders' profit depends on the company's performance. This profit is determined by the gap between the amount they invested at a time period "t" to get a given number of share "X" and the value of these shares at a time period "t+n". A stockholder realizes a capital gain when the value of the shares he holds is higher than the value at which he has purchased them. A shareholder could also get dividends. A dividend is a payment in cash or in stocks made by a company to its stockholders.

Extraits

[...] Conclusion The lessons learned from this analysis are that a firm applies a strategy determined by the resources it owns, the structure it has adopted and the environment within which it evolves. Hence, its dividend policy will be affected by its corporate structure, its life cycle stage, the tax rate and other external elements such as transaction costs. The dividends policy irrelevance means that a firm cannot create value through its dividend policy. Unfortunately, the assumptions used to demonstrate this proposition are unrealistic. However, it can be noted that this proposition, in spite of its weaknesses shows that a firm cannot hide its lacks to shareholders by paying them dividends. [...]

[...] and F. Modigliani Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 411-433 Rajan, R. and L. Zingales What do we know about capital structure? Some evidence from International Data, Journal of Finance, v50 1421-1460. Vernimmen, P Finance d'entreprise, Dunod, Ch 42 Vernimmen, P Finance d'entreprise, Dunod, Ch 42 [2]¿h(isi”j.kˆkŠkôk>l@lm mÊmÌmÐmÒmÞnßnànënìnGpHpŸq Rajan, R. and L. Zingales, What do we know about capital structure? Some evidence from International Data, Journal of Finance v50, 1421-1460. Idem Miller, M. [...]

[...] So in the case of a listed company or a company for which it is possible to sell the stock, the most important element for shareholders is the increase in value of the company, because this increases allows them obtain capital gains if they sell their stocks. References Damodaran Aswath. Applied corporate finance: A User's manual (2nd edition). Wiley, Ch 10 Jensen, M.C. and W.H. Meckling 1976. Theoty of the firm: managerial behavior, agency costs and ownership structure. Journal of financial Economics, 323-329 Miller, M. [...]

[...] A dividend is a payment in cash or in stocks made by a company to its stockholders. This means that in order to be able to pay dividends, a firm should achieve good performances. But this does not mean that all the performing firms pay dividend. As an example the French listed firm DECAUX” has never paid dividend, as “BERKSHIRE HATHAWAY”[1] which is owned by Warren Buffet. Hence the mains questions are to know if a performing corporation should pay dividends and if dividend is remuneration supplementary to capital gain, otherwise it consists of whether or not dividend policy is relevant The factors affecting dividends payments 1. [...]

[...] Other factors such as tax treatment can affect dividends policy. Concerning the tax treatment, in some countries like in the United States, dividends are double taxed, while it is not the case in others countries. For instance, in Germany it is better for a company to pay dividends than to retain its earning, because the tax on retained earnings has a higher rate than the one on corporate dividends. But if the taxes on dividends are higher than those on capital gains, one can say that paying dividends destroy value for shareholders. [...]