Analysis about Determinants of Dividend Policies

Added on - 22 Jul 2020

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Determinants of DividendPolicy
Table of ContentsTopic: “Analysis about determinants of dividend policies ”...........................................................1CHAPTER 1: LITERATURE REVIEW.........................................................................................11.1: Introduction on Dividend policy:....................................................................................11.2: Dividend policy theories.................................................................................................21.2:1: Dividend irrelevance theory.........................................................................................21.2.2: Bird in hand theory.......................................................................................................31.2.3: Signalling Hypothesis...................................................................................................41.2.4: Tax-Effect Hypothesis..................................................................................................41.2.5: Agency costs and free cash flow hypothesis................................................................52: Determinants of dividend policy........................................................................................52.1: Factors influencing dividend decision............................................................................82.1.1: Agency cost:................................................................................................................82.1.2: Size...............................................................................................................................92.1.3: Profitability...................................................................................................................91.2.4: Relationship among dividend and investment decision:...........................................10CONCLUSION..............................................................................................................................10REFERENCES..............................................................................................................................12
Topic: “Analysis about determinants of dividend policies ”.CHAPTER 1: LITERATURE REVIEW1.1: Introduction on Dividend policy:In any corporate finance would, it is essential to determine two of the most importantaspects those are related with operational decision that are helpful for finance managers to dealwith all kind of financial issues. The capital budgeting and operational decision making are vitalaspects that are needed to be taken into consideration while making any critical decisions. Allthose decision making which are being done by management would be relate with assets that afirm use to acquire. While in case of financial decision that entire focus is make on appropriatemeasure to finance those assets. At the time, company starts producing profits they need to makeanother decision can be arises which is related with the distribution of profits in between variousshareholders or investors that are close partners of an organisation.According toHussainey, Oscar Mgbame and Chijoke-Mgbame, (2011),dividend policywhich is related with distribution of cash or shares to different shareholder over the period oftime. This has been seen that all level of equity would be kept as retained earning in the companywhich is affected because of dividend decision. At the time of distribution, financial managersalways keep control about all selection process of divided policies. It can impact wealth ofcompanies and most effectively, the wealth of the stakeholders.In the opinion ofAl-Shubiri, (2011)various dividend policy will be analyse in recent pasttime between financial economists. Apart from this, plenty of studies have been carried out toresolve the queries associated with dividend plans, but it remain unsolved. Because of widerange 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 corporatedeterminants of dividend policy and that are related with theoretical aspects. It has beensummaries 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 beenevaluated in dividend policy literature. The primary manner of analysing dividend payout,certain relevancy of dividends, inter-nation comparison in company's total distribution ofdividend in and disappearing dividends in emerging market. In the word ofArif and Akbarshah,(2013)there are basically three methods that are being found for establishing setting of dividendpolicy between various companies. Initially, there are certain companies that target long term1
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 believeaccording to the perception of various investors and stakeholders. Lastly, few managers willconsider certain changes as per the level of dividend payout which depend significantly onvariable data to close investors.From the managers point of viewsLeary and Michaely, (2011)the present rate ofdividend payouts is basically helpful as a benchmark to fix dividend policy rates. Thus, changesin specific rate of dividend in companies which means that financial policy of them are havingspecific aspects about variation to reduce dividends. But other will decide not to pay dividend atthe rate shareholder are demanding. AsAgyei and Marfo-Yiadom, (2011)changing dividendpolicy determine modification in total companies earnings. companies with valuable and stablerate 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 areconveys information about financial distress. This has been observed that finance manager oraccountant are mainly unwilling to omit or reduce dividends that are discussed byKent Bakerand Powell, (2012).1.2: Dividend policy theoriesUnder this particular sectors which is analyse by taking effective theories and methodsthose are associated with dividend policy. It consists of dividend irrelevance hypothesis andvaluable theories such as Bird in hand theory as well as tax preference theory.1.2:1: Dividend irrelevance theoryAccording to this particular theory those are working on capital structure irrelevanceproposition, MM (Modigliani and miller) which is having no taxes and bankruptcy expenses. Itmeans that there is no any effect from dividends on companies capital structure or stock pricesduring the time. As per the MM model, in a perfect market situation the share price of companiesand shareholder wealth is not going to affect through using dividend policy. Henceforth, theythink that total value of organization is examine through its total investment decisions. In orderwords, 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 particulartheory are discuss underneath:There is no tax difference among dividends and capital earnings.2
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