Analysis of Dividend Policy and Potential Implications of Brexit

This document provides an analysis of dividend policy based on relevant theories and discusses the potential implications of Brexit on the UK financial services industry. It covers topics such as dividend payment preferences, theory of irrelevance, tax benefits from reinvestment of profits, regulatory implications, and potential impacts on banking, insurance, asset management, and clearing transactions.

Running head: FINANCIAL MANAGEMENT
Financial Management
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Table of Contents
Part A:...................................................................................................................................................2
Analysis of two perspective of dividend policy based on relevant theories...........................................2
Introduction:......................................................................................................................................2
Narrative discussion of relevant theories:..........................................................................................2
Theory of dividend payment preferences (A bird in the hand):.........................................................3
Theory of irrelevance (Theory of indifferent to dividend policy):.....................................................3
Theory of tax benefit from reinvestment of profits:..........................................................................4
Conclusion:............................................................................................................................................4
Part B:....................................................................................................................................................6
Potential implications of BREXIT for the UK financial services industry.............................................6
Introduction:..........................................................................................................................................6
Regulatory Implications:.......................................................................................................................6
Potential Implications on the City:........................................................................................................7
Banking:............................................................................................................................................7
Insurance and reinsurance:................................................................................................................8
Asset management:...........................................................................................................................8
Clearing transactions:........................................................................................................................9
Spill-over effects:..............................................................................................................................9
Conclusion:............................................................................................................................................9
References:..........................................................................................................................................11

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Part A:
Analysis of two perspective of dividend policy based on relevant theories
Introduction:
Dividend policy is recognized as the policies with the help of which a company can
bear their expenses that is incurred for paying the dividends to different partners. The
companies which shows surplus in terms of profit at the end of financial year, they generally
have two options (Baker and Weigand 2015). These two processes of profit management are
either investment of the money into the business practices itself or the company may divide
the money among all of their stakeholders in terms of profit gained out of the expenses that
they have made throughout the financial year.
The discussion of dividend in terms of its relevancy in the business has been
recognized as the most important aspect as this shows the path to develop the profit making
practices and this makes an efficient market place (Brigham et al. 2016). There is a big
theoretical elaboration why the dividend policy has been adapted for increasing the future
development possibilities for a business. This aspect makes the stakeholders aware of the
right path where they have to build their idea for successful profit making procedures.
Narrative discussion of relevant theories:
Dividends are always common and simple way of returning the profit gained by a
firm to their employees, in spite of this fact there are some companies who doesn’t chose to
apply this method. As an example Alphabet and Berkshire Hathway are well known firms
those don’t use the divided method for returning their profit to their employees. In this case
there are several economic recessions that influences the companies to not to follow dividend
rules (Priya and Mohanasundari 2016). Apart from this reason the company might also face
difficulty while distributing the money as their employees are not returning equal amount of

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efficiency on their work to get the profit back out their business earnings. The consideration
of Alphabet and Berkshire Hathway though does not follow these uncertainties however there
are other theoretical explanations that impacts their dividend policies.
Theory of dividend payment preferences (A bird in the hand):
This part of the discussion is mainly focusing on the importance of dividend of any
firm as these increases the satisfaction level of the stakeholders along with the valuation of
the company (Caliskan and Doukas 2015). This explains that the valuation or position of the
companies is determined by the dividend provided to their employees. This particular theory
also elaborates that the value of shares for the particular firm increases in terms of the
increment in dividend.
The cost of shares is evaluated in terms of the basic rates in the market. According to
Bergmann (2016), the value of any share is determined by the amount of money it returns.
The long term price of any share is nothing but the sum of current selling price and current
purchasing price for it. Any kind of uncertainty in the market condition can impact on the
share prices along with the dividend values in terms of the net profit gaining for the
stakeholders.
Theory of irrelevance (Theory of indifferent to dividend policy):
The theory related to dividend-irrelevance is mainly focusing on the total income of
the company which is completely dependent on the capital structure and this capital structure
is nothing but the debt to equity ratio. According to this particular theory, the arbitrage is
getting affected by the market participants as they are an important part of the market (Baker
and Weigand 2015). The perfect capital market does not include the taxes, zero fees and
bankruptcy costs. According to the definition of perfect market capital, the company’s share
values are only not dependent on the dividend policy. This theory focuses on the new share

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creation as this believes that the new share values will be able to increase the financial
condition of the companies. This particular aspect portrays the total dividend and investment
is equal with the profit gained by selling of new shares.
Theory of tax benefit from reinvestment of profits:
This particular theory highlights the facts and practices which is creating burden on
the dividends in terms of the gains from the business practices. The theory clarifies that the
tax of the dividends should cleared immediately but the tax for the shares should be
entertained while selling them (Chen, Li and Zeng 2014). Companies are liable to pay the
dividend just to keep their shareholders wealthy. Companies can always reduce the amount of
paybacks in terms of taxes, if they buy the shares back while selling them to other
stakeholders of different companies. Such as, Berkshire and Alphabet never pay their
dividends as they want to reduce their expenditure in terms of capital gained and this
particular aspect result into their price increment of their shares. This theory comprises this
fact that, if the taxation burden on the dividends is higher in terms of profit gained then the
taxpayer should not pay any dividends for maximizing the net income (Sander et al. 2014).
Apart from this, the taxpayers can also repurchase the shares to save their net income gained.
Conclusion:
This particular discussion portrays the dividend policies and its benefits over the net
income gained by the taxpayers. These taxable dividends are considered as economically
balancing factor that decides the company’s net income policies and also determines share
values.
In contrary with this previous elaboration, companies like Google and Berkshire
prefers capital gains in spite of dividends. Hence they apply different set of rules in

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maintaining their share values as well as financial conditions in the market. Whereas, Tesco
or Sainsbury pays their dividends as they have lack of investment in their business lifecycle.

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Part B:
Potential implications of BREXIT for the UK financial services industry
Introduction:
Financial service is regarded as the diverse industry that consist of the businesses
having different features and deliberations. There are several retail banks that are concerned
from the communication of government and controllers regarding their recommended
approach towards Brexit is either unsatisfactory or undecided (Howarth and Quaglia 2018).
The constant success of the UK economy as the main hub for financial service is regarded as
the central theme in the debate of Brexit. The decision of Britain on Brexit is in the
referendum. However, there are large number of uncertainty relating to future of UK. As of
now, UK is yet to officially inform the European Commission relating to its intention of
leaving the EU and no one knowns when this would take place.
Estimations on the size of the probable effect of Brexit on London is only suggestive
as negotiations have not yet began relating to the timing and nature of the EU exit. If UK
makes the move of potential Brexit then the financial services that would be highly impacted
is the banking sector followed by the market infrastructure, asset management and
reinsurance services.
Regulatory Implications:
The corporate banks have equally expressed their concern that poor statement by the
government and controllers in the UK and Europe is compelling them to strategize for the
worst. They have particularly expressed their concern that no deal Brexit and exit from the
EU devoid of any kind of changeover procedure may harm on their business (Cumming and
Zahra 2016). During the short term, investment banks have pinned their hopes on the

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transitional deal. Nearly around three-quarters have warned that UK exit from the EU without
any kind of arrangement may create a harm to their business.
The regulatory implications for UK constitutes a sharp legislative test for the city of
London as regulations of more than 40 years is not enshrined in the UK law. Surely, if UK
takes the decision to Brexit, then it is likely that companies that are anticipating to perform in
UK may face increasing demands for regulations and in their likelihood they would be
required to adhere with the MIFIDII rules when the same is introduced.
Potential Implications on the City:
Banking:
Around 80 per cent of the banking segment revenues in UK is not directly reliant on
the pass-porting as retail and business banking is overpoweringly domestic. Nonetheless,
estimations reflect that around £25 billion of revenues comes from the EU linked banking
business or around 23 per cent of the total retail and banking business (Wright 2016). The
probable effect of Brexit on the banks is dependent on the EU markets is the rise in the
operating costs verbalized by the re-organizations and the likely need of opening a subsidiary
in the EU.
Consequently, the smaller banking institutions might think of leaving the London city
or may continue to serve the markets of EU by merging with the other bigger banks. This will
probably enable them to continue their activities within the city by bearing added cost of
reorganization and compliance inside the EU rules. According to the assumption of Schoof et
al. 2015 around one-third of the banking business related to EU is at the risk of relocation that
sums up around £8 billion of revenues. In the recent announcement by HSBC, being the UK’s
largest international bank have announced that around 1000 of its 5000 jobs in London may be
impacted by Brexit.

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Insurance and reinsurance:
Majority of the reinsurance services in the EU economies are previously operating
with the help of their subsidiaries. Therefore, making an exit from the single market has the
possible consequence on the sector. Estimations shows that around £4 billion of insurance
and reinsurance industry revenues or 10 per cent of the overall revenue is from the EU linked
business (Dhingra et al. 2016). However, around 75 percent of the services of insurance and
reinsurance are rendered through subsidiaries. Therefore, around a quarter of the incomes
from these subsidiaries or approximately £1 billion might be lost to the competitors because
of Brexit.
Asset management:
Around £6 billion or in other words 25% of the asset management revenues of UK
originates from the business that are associated to UK that would be directly impacted by the
Brexit. Deficiency of correspondence in the underlying regulations may signify a loss of
direct access to the pass-porting. Henceforth, any funds in UK that are marketed in the EU
and any EU funds in the UK would be required to adhere with the domestic requirements or
limitations of every EU nation (Los et al. 2017). The asset managers based in UK would be
required to set up the subsidiaries all through the Europe to constantly administer their funds
that domiciled there in the effective way. Accordingly, investment activities might turn out to
be highly multifaceted for the customers. Around a one third to one half of the EU related
business £2-3 billion might look for the new home.
Private equity funds of US such as Blackstone and Carlyle have made announcement
of their plan to set up the pass-porting rights in the Luxembourg to maintain the business
capability of doing trade in the European Union following the Brexit. While firms like
Morgan Stanly and Aberdeen Asset Management are exploring their options for new

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headquarters in the European Union (McMahon 2016). So far these results do not spell out
the numbers of jobs that would be moved away from London.
Clearing transactions:
Another potential implications for Brexit is leaving the sole market may result in
noteworthy significances for the City’s role in the activities of clearing because UK would be
held as third country under the EU leading to an effect on half of the city’s business. This
sums up around £11 billion and perhaps lead to partial transfer of the euro clearing activities
to the market in the Eurozone (Dhingra, Machin and Overman 2017). Fragmenting the
functions of UK all through the countries might lead to a rise in the cost for the UK and
clients of non-UK due to increasing inefficiencies. Around half of the business under this
segment or £6 billion of the revenues may be lost to competitors.
Spill-over effects:
The secondary impact of the Brexit may be wider than the those that are described in
the above stated four sub-segments but they would emerge in the years to come. This is
mainly due to the strong interconnections among the financial services segments and sub-
segments particularly in the auditing, lawful services, management consultancy, real estate
and other professional business that could act as the centre force in retaining the business
within the London city despite due to high costs.
According to the estimations of McMahon (2016) around 15-20 of the business
activities in the auxiliary segments or around £17 billion in revenues would be significantly
impacted by the Brexit. The impact of Brexit approximately gets double once the network of
supplementary services that supports the efficient functioning of the city is taken into the
considerations.

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Conclusion:
Conclusively, Brexit would create a negative impact on London City. The
government of UK reactions of leaving single market may to be revisit some financial
regulations in an attempt to introduce more investment. However, such kind of policy might
cause regulatory contest with main financial markets. The uncertainty that surrounds the
transition from the EU and likely modifications in the regulatory stances of UK government
may be restraints to the new corporate.

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References:
Baker, H.K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial
Finance, 41(2), pp.126-144.
Baker, H.K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial
Finance, 41(2), pp.126-144.
Bergmann, M., 2016. The rise in dividend payments. RBA Bulletin, March, pp.47-56.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Caliskan, D. and Doukas, J.A., 2015. CEO risk preferences and dividend policy
decisions. Journal of Corporate Finance, 35, pp.18-42.
Chen, S., Li, Z. and Zeng, Y., 2014. Optimal dividend strategies with time-inconsistent
preferences. Journal of Economic Dynamics and Control, 46, pp.150-172.
Cumming, D.J. and Zahra, S.A., 2016. International business and entrepreneurship
implications of Brexit. British Journal of Management, 27(4), pp.687-692.
Dhingra, S., Machin, S. and Overman, H., 2017. Local economic effects of Brexit. National
Institute Economic Review, 242(1), pp.R24-R36.
Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J., 2016. The impact of Brexit on
foreign investment in the UK. BREXIT 2016, 24, p.2.
Howarth, D. and Quaglia, L., 2018. Brexit and the battle for financial services. Journal of
European public policy, 25(8), pp.1118-1136.
Los, B., McCann, P., Springford, J. and Thissen, M., 2017. The mismatch between local
voting and the local economic consequences of Brexit. Regional Studies, 51(5), pp.786-799.

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McMahon, M., 2016. The implications of Brexit for the city. Brexit beckons: Thinking ahead
by leading economists, CEPR Press, London, pp.95-101.
Priya, V. and Mohanasundari, M., 2016. Dividend Policy and Its Impact on Firm Value: A
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Technology, 3(3), pp.59-69.
Sander, P., Teder, A., Viikmaa, K. and Kantšukov, M., 2014. The distributed profit based
corporate taxation, and the valuation of cash holdings. International Journal of Trade,
Economics and Finance, 5(3), pp.212-217.
Schoof, U., Petersen, T., Aichele, R. and Felbermayr, G., 2015. Brexit–potential economic
consequences if the UK exits the EU. Bertelsmann Stiftung, 8.
Wright, W., 2016. The Potential Impact of Brexit on European Capital Markets. New
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