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Chapter 19: Dividend Policy
Learning objectives
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The area of finance has no neat over-arching theoretical model to provide a simple answer. However, there are some important arguments which should inform the debate within firms. After working through this chapter you should be able to:
- explain the rationale and conclusion of the ideas of Modigliani and Miller's dividend irrelevancy hypothesis, as well as the concept of dividends as a residual;
- describe the influence of particular dividend policies attracting different 'clients' as shareholders, the effect of taxation and the importance of dividends as a signalling device;
- outline the hypothesis that dividends received now, or in the near future, have much more value than those in the far future because of the resolution of uncertainty and the exceptionally high discount rate applied to more distant dividends;
- discuss the impact of agency theory on the dividend decision;
- discuss the role of scrip dividends and share repurchase.
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