The Dividend

Decision
Anuj Goenka
Chintan Bhandari
Siddharth Shah

Introduction
Black (1976) in his study on dividend wrote, The harder
we look at the dividend picture the more it seems like a
puzzle, with pieces that just dont fit together.

Foundational theoretical research proves that in efficient

markets, dividends are deemed irrelevant for firm value.

In case of inefficiency, standard finance theory has

reintroduced justifications for paying dividends.

Introduction
Theories of dividend payments include :
Dividends are simply a residual paid after setting investment policy
Dividends are a signal of value
Dividend payments discipline managers from empire building, losing money
on projects, etc.

Dividends reflects the attribute s of investors they serve

Certain reasons why dividends is puzzling is due to high tax rates

imposed on them by most countries

Factors Influencing Dividend

Decision
Stability of earnings

Growth needs of the company

Financing policy of the firm

Profit rates

Liquidity of funds

Legal requirements

Dividend policy of competing firms

Policy of control

Past dividend rates

Corporate taxation policy

Debt obligation

Tax position of shareholders

Ability to borrow

Effect of trade policy

Attitude of the investor group

Literature Review

Literature Review
Jensen (1986) argues that paying dividend forces managers to
disgorge cash flow and leads to poor stewardship of the
shareholders money in general.

Miller (1986) noticed that dividends were taxed at twice the rate of
capital gains on shares.

Blume (1980) concluded that investors seem to shun extreme

dividend policies but not high dividend yielding stocks.

Shefrin & Statman (1984) presented a justification of the payment of

dividends which invokes the Kahneman and Tverskys prospect
theory.

Literature Review
DeAngelo & Stulz (2006) stated that US companies with a high
ratio of retained earnings to total shareholders equity, book
value, pay dividends while those with low, or negative, retained
earnings relative to shareholders equity do not.

DeAngelo et al.(2006) studied US non-financial firms in the years

1973-2002 and recorded a steep decline in the number of firm
paying dividends.

Brav et al. (2005) found that managers feel share repurchase is

better than initiating dividends.

Literature Review
Dhanani(2005) finds that it is hard to support any particular
theory of what determines dividends, but also concludes:
No relation exists between investment policy, capital structure and
dividends

Dividend is seen as a signal of value and sustained improvement in

company performance

Dividends are rarely raised to discipline managers

Tax status seem to have little impact on dividend policy

Behavioral Corporate Finance

Baker and Wurgler (2011)

Agents: Manager and Investor

Responses to securities mispricing and managerial
decisions

Approaches: Catering Approach

Behavioral Signaling

Catering Approach
Assumptions
1.Imperfect arbitrage; markets are inefficient and rational
investors have limited ability to correct mispricing

2.Managers are smart; can distinguish market prices and

fundamental value

Managers perceive these mispricing and make decisions to

boost share prices above fundamental value known as catering

Catering Approach
Long (1978): Investors view cash dividends as a salient
characteristic

Baker and Wurgler (2004): Firms initiate dividends when shares of

payers are at a premium and omit dividends when payers are at a
discount

Baker and Wurgler (2004): Premium reflects sentiment for safe

dividend payers versus risky nonpaying growth firms

This sentiment leads to investors flocking to the perceived safety of

payers in gloomy periods and bid up their prices

Catering Approach
Focuses on managers understanding and actions
Limitations
1.No clear answer to why investor demand for payers vary
overtime; tax code changes, changes in behavioral biases
affecting such demand like loss aversion, reference
dependence

2.Only categorizes payers and non-payers and does not focus

on quantum of payment

Behavioral Signaling
Assumption
1.Investors are quasi-rational; have standard preferences
and rational expectations

Investors are loss-averse over the level of dividends;

upward revision of dividends today signal that managers
can meet or exceed that level tomorrow

Focuses on quantum of payment and investor expectations

Behavioral Signaling
Based on
1.Reference Dependence: judging utility derived by a reference
point level of dividends

2.Loss aversion: tendency to perceive more disutility from

decrease in dividends than utility from an equal-size increase

Goals
1.Why firms pay dividends at all; some sort of signal
2.Prove that dividend cuts are greeted very negatively

Research Gaps

Research Gaps

1. From the managements perspective

2. From the investors perspective

Dividend Policy- Managements

Perspective

Dividend Policy- Investors

Perspective

Methodology

Methodology
The investors' perspective is different for the different sectors

Event study
Lintner model
Factor analysis
By administering the survey

thank you