A Definition And Explanation Of Dividends Finance Essay

When a house makes a net income or excess, it can either utilize this money in future investing ( as retained gaining ) or can be paid to the stockholders. It is most popular that houses retain a part of their earning and pay the staying part to stockholders. The part of corporate net income paid out to its stockholder is called dividend. The term “ dividend per portion ” is referred to as the amount of declared dividend for each ordinary portion issued.

“ Dividend policy ” is defined as “ the finding of the proportion of net incomes sporadically paid out to stockholders ” . In other words, it indicates the determination of net incomes between payment to stockholders and reinvestment in the house ( Malla, 2009 ) . The payout ratio is one of the major determination to be made by the Boards, nevertheless this is non the lone issue ; signifier of dividend, payment method and process besides need to be taken in to account. Malla besides suggested that, when a house wishes to follow a stable dividend policy ( in which a hole sum of dividend payment or dividend growing rate is maintained over a period of clip, irrespective of alterations in net incomes and other factors ; This is considered a desirable policy as it has positive impact on market monetary value of the portion ) it can accomplish this in three ways:

+Stable DPS

+Stable payout ratio

+Combination of take downing regular dividend but excess particular offers, ( such as bonus portions ) to stay a changeless payout rate ( or dividend growing rate ) . This offers the houses flexibleness, yet satisfies stockholders.

In every fiscal twelvemonth, there may be interim dividend ( which is related to the fist half-year trading ) and concluding dividend ( which is paid after the fiscal twelvemonth terminal ) . However, some companies may pay dividend quarterly or may non pay dividend. Although the dividend degree is recommended by the Board of Directors, stockholders have the right to vote for this at the one-year general meeting. ( Arnold, 1998 )

Dividends can merely be paid out of the accrued distributable net income, non the capital. Therefore, even though a company made no earning, dividend may still be paid, provided that they have retained net income from old old ages. The proportion of after-tax net income paid as dividends ( besides known as the pay-out ratios ) truly varies between houses, from 0 to more than 100 per centum. ( Arnold, 1998 )

Forms of payment

Normally, dividend paid to a stockholder is in proportion to his shareholding. Dividend can be paid in different signifiers:

+ Cash dividend: by and large means the dividend paid out in currency ( hard currency, bank transportation and check ) and is the most popular method of dividend payment. Firms pay hard currency dividend after paying corporate revenue enhancement, and the dividend receivers besides have to pay personal revenue enhancement as this is a signifier of investing income.

+ Stock dividend: dividend can be given in the signifier of bonus portions of the publishing company or its subordinate company. This dividend is harmonizing to the proportion of shareholding. Bonus portions are besides distributed to stockholders in new portion issues, as a compensation for the dilution consequence, as the current portions lessening in value.

+ Property dividend: Dividend is paid out in the signifier of merchandises or services provided by the company or its subordinate company. However this signifier is seldom used.

+ Other dividends: Warrants and fiscal assets with a recognized market value may besides be distributed to stockholder as dividend.

Among those signifiers above, hard currency dividend is the most popular, and Malla ( 2009 ) suggested that a house should hold adequate hard currency in custodies when declaring dividend, otherwise it should borrow money to cover this. Payment of hard currency dividend should non do liquidness job for the house.

Dividend payment cause decrease to both hard currency history and modesty history of the house, it besides cause decrease to the entire plus and the net worth of the company by the sum of dividend distributed. On the other manus it has the direct impact on stockholders, which Malla ( 2009 ) defined as the “ psychological value ” . He argued that most stockholders prefer to roll up their return in hard currency ; therefore dividend is non merely a mean of gaining distribution but besides a mean of informing assurance about future betterment in capital market. Hence he points out objective of hard currency dividends are:

+ Earning distribution

+ Constructing an image in the capital market in order to fix better entree to beginnings of fund when needed in the hereafter.

+Perception hereafter betterment to stockholders.

The impact of hard currency dividend policy on portion monetary value is considered to be indispensable for both determination shaper every bit good as research workers. Numerous old surveies has been carried out, topics to the inquiries whether or non peculiar dividend policy can assist maximise stockholder ‘s wealth, whether or non houses with high dividend sold with premium, whether or non portions of houses who retain their net income alternatively of paying out be sold at lower monetary value? However, there seems to be no consensus on those survey consequence, as there are ever other relevant factors impacting market portion monetary value, doing troubles for research workers to measure the impact of dividend declaration entirely ( Saedi, 2010 ) .

Dividend day of the months

Harmonizing to the Securities and Exchange Commission site, sing dividend proclamation, the undermentioned day of the months are important:

+ Declaration day of the month ( proclamation day of the month ) is the day of the month that the Board of Directors announces their determinations about dividend payout. Record and payment day of the month are besides declared on this twenty-four hours.

+ In-dividend day of the month is the last twenty-four hours that portion is deemed to include dividend. If any share-trading is carried out on this twenty-four hours, the purchaser will have the dividend whereas the marketer will free his right to have dividend. In-dividend day of the month is typically one trading twenty-four hours before the ex-dividend day of the month.

+Ex-dividend day of the month is the twenty-four hours on which all portions traded become no longer attached to the right to have the most late declared dividend. This is an of import day of the month for any company that has many shareholders, including those that trade on exchanges, as it makes rapprochement of who is to be paid the dividend easier. Existing holders of the stock will have the dividend even if they now sell the stock, whereas anyone who now buys the stock will non have the dividend. It is comparatively common for a stock ‘s monetary value to diminish on the ex-dividend day of the month by an sum approximately equal to the dividend paid. This reflects the lessening in the company ‘s assets ensuing from the declaration of the dividend. The company does non take any expressed action to set its stock monetary value ; in an efficient market, purchasers and Sellerss will automatically monetary value this in.

+ Record day of the month is typically 2 trading yearss after ex-dividend day of the month. The intent of this day of the month is for portion issuer to corroborate dividend receivers who already registered in their stockholder record.

+Payment day of the month: is the day of the month that stockholder officially receive dividend. For case, it ‘s the day of the month that checks are sent to them, or their securities firm histories are credited.

1.1.2 Theoretical account of dividend Clientele consequence theory

Classical surveies on dividends revealed that, stockholders are different in their dividend penchant. Basically there are two category of patronage: those prefer high proportion of net incomes and those prefer low payout rate ( Arnold, 1998 ; Lumby and John, 1981 ) . Investors with small or no other uninterrupted beginning of income ( such as retired people ) belong to the former category. As they need a steady flow of income, they tend to pay more involvement to houses with high and stable dividend policy. Although it could be argued that a steady hard currency flow watercourse can be generated by selling off some of their portions, this appears to be impractical in fact. The first ground for this is the liquidness of portions. When selling portions, investors have to cover with dealing cost ( such as securities firm, the clip value of money lost during the procedure of tradingaˆ¦ ) moreover, most stockholders behaviorally dislike “ delving into capital ” by selling off their portions. The 2nd category of stockholders is those who are non interested in having high dividends in close term. Affluent middle-aged investors may be a good illustration of this category. They prefer to put in houses with good growing potency ; and accept low dividend so that these houses can utilize this beginning to finance positive NPV undertakings to maximise portion value. For this group of patronage, even when high dividend is paid to them, they likely use this money to reinvest in other portions which they regard to hold great growing potency ( Arnold, 1998 )

Capable to clientele penchants, force per unit area is put on direction: they need to stay a stable and consistent dividend policy because investors need to cognize whether or non the dividend form will go on to accommodate them. Inconsistency would deject certain category of patronage and hence hurt portion monetary value. Another ground for consistence is that, dividend decrease is regarded as a mark of failing and deficiency of assurance about future net incomes. However direction are really prudent with dividend addition, as when declaring it, they have to guarantee that the new dividend degree can be at least remained, or improved upon in the hereafter. Unfortunately, consistent dividend form may attach to disadvantages for the house: the chance cost of losing investing chances as after dividend payment, the house is left with deficient beginning of finance. If the house wants to widen its investing, it will hold to raise finance from external beginning which may be expensive. Indeed, these eventful costs will, in bend, recoil to stockholders. However, as consistent dividend form is still much attractive to stockholders whose ingestion form agreements with it, houses tend to stay it and such policy is frequently referred to as originating from the “ clientele consequence ” ( Lumby and Jones, 1981 ) . Agency cost theory

Agency theory is the theory refering the struggles between people with different involvement in the same assets, particularly the stockholders and directors of companies. Particularly in modern concern environment, there is progressively big separation between ownership and direction, and sometimes there may be struggles between directors, inside proprietors ( commanding stockholders ) and outside stockholders ( such as minority stockholders ) in payout ratios determinations ( Kuwari, 2009 ) . La Porta et Al. ( 2000 ) illustrates that, when insider proprietors pay hard currency dividends, they return steadfast net income to stockholders and can no longer do usage of this net income in future investing chances.

Agency theory suggests that directors ( the agents ) may prefer to move for the best involvement of themselves instead than of the stockholders. Therefore, high payout ratio is a method for stockholders to recover some control over the usage of their money. This, in bend, will do trouble for director when they need financess for investing. Arnold ( 1998 ) indicated that, when a house expects to raise external capital, its investing program should be analyzed by:

Investing bankers who will confer with on the undertaking

Investment bankers who will analyze both the house and its investing undertaking as their repute will be attached with these

Credit-rating analysis

Agency analysis ( who consult both the house ‘s current and possible stockholders )

Current stockholders

Normally, stockholders can exert their control on the house by voting at the general meeting or by selling their portions. If they are non convinced about the investing program or the managerial behaviour, they may decline to purchase the house ‘s portion issue.

From the position of behavioural finance, directors are sometimes over-optimistic about the investing chances ; and over confident about their investing ability. From creditor ‘s position, the bureau job is: directors may payout a disproportional sum of dividend in order to maintain the money out of the range of creditors, particularly when the house is in danger of failure. Therefore, creditors sometimes restrict the house ‘s degree of payout ratio in their recognition understanding ( Arnold, 1998 ) .

In visible radiation of bureau theory, free hard currency flow should be used to pay dividend to avoid steadfast value lessening. Jensen ( 1986 ) defined free hard currency flow as “ the hard currency flow in surplus of the financess required for all undertakings with a positive NPV ” . He so suggested that as hard currency flow additions, it give raise to the struggle between directions ; commanding stockholders and outside stockholder, taking to corporate direction public presentation worsen. The struggle is: while stockholders expect directors to maximise portion value, directors prefer to profit themselves. Additionally, La Porta et Al. ( 2000 ) indicated that when a house has big free hard currency flow, its directors tend to prosecute in uneconomical patterns: directors of houses with extra free hard currency flow tend to overinvest by accepting fringy investing undertakings with negative NPV. Additionally, Lang and Litzenberger ( 1989 ) found that the mean return on the proclamation -day of noteworthy alterations in dividend is unusually higher for overinvesting houses compared with others. Therefore, it is strongly recommended that big free hard currency flow houses pay more dividends to its stockholders.

Furthermore, when a house pays out its free hard currency flow in footings of dividend, capital outgos will be financed by other resources such as new portion issues or adoptions. This will set more force per unit area to directors and coerce them to work more expeditiously, thereby cut downing the bureau struggle and the bureau cost. Harmonizing to Abeyratna ( 1994 ) :

“ The presence of new fund elevation would bespeak that dividends do non stand for disinvestment. It besides would insulate the set of houses whose directors were non able to trust entirely on internally generated financess and for which, hence, dividend might cut down bureau costs ”

Another manner of work outing bureau costs is to allow the directors have a certain sum of equity keeping in the house, by this manner cut down the struggle between their involvement and the stockholder ‘s. If this is the instance, dividends should less concern investors, with premise that:

-investors own a big sum of ordinary portions

-share ownership is widely dispersed

Gul ( 1999 ) supports this statement with findings that dividend payout performs a positive relationship with foreigner ownership and a negative relationship with insider ownership.

1.1.3 Determinants of dividend determinations

The determination of dividend payment is influenced by the environment and context which it is in. Jensen & A ; Johnson ( 1995 ) suggested that this determination is non merely influenced by internal factors such as company ‘s size ; ownership construction ; profitableness ; liquidness and investing chances… but besides influenced by external factors such as revenue enhancement and legal conditions. Company nature Company size and age

Previous surveies suggested a positive relationship between company size and its dividend determinations. Fama and Frenche ( 2000 ) suggested that big companies tend to hold higher payout ratios than little 1s. Additionally, Sawicki ( 2005 ) indicated that dividend payment can assist to indirectly supervise public presentation of large-company directors. The ground is, in big companies, information dissymmetry additions due to ownership scattering, decreasing the stockholder ‘s ability to command the company ‘s activities ; ensuing in inefficient direction public presentation. In this instance, big dividend payment can be a solution because this cause the demand for external funding, and the being of creditors will assist better company direction.

Surveies besides revealed that big company have better entree to capital markets and can finance their investings at lower costs. This allows them to pay more dividends to stockholders.

Company age besides influences dividend determination: a freshly established company has to retain net incomes for future enlargement programs, and hence can non afford to pay a high rate of dividend. Meanwhile, a well-established company would hold retained adequate militias and hence can give generous dividend determination. Ownership construction

Several surveies have suggested that the ownership construction of a company determines its payout ratio. Gul ( 1999 ) argued that there is a positive association between authorities ownership and dividends: companies with high authorities ownership will finance investing undertakings more easy ; and hence, can afford to administer more dividends. In contrast, lower authorities ownership houses face more troubles in raising money ; and hence are more likely to retain net incomes for future investings ; and therefore paying fewer dividends.

Additionally, distribution of shareholding affects dividend payment. In a company whose shareholdings are closely-held, it is easier Board of Directors to prorogue the dividend and set all the earning to militias. However, in a widely-held company, with a big figure of stockholders, it is much more hard for the determinations of cut downing or suspending dividend to be made. This besides relates to the investors ‘ penchants: if most stockholders are from the middle-class group of society, they expect a higher and more stable dividend, and this outlook will every bit good affect the Board ‘s determination devising. Company hazard

It has been argued that companies with higher hazard ( unstable current and future earning ) tend to avoid committedness to pay big dividend payment. This will assist them maintain dividend payouts stable ( as most stockholders expect to have non less than dividend received in the yesteryear ) . Low dividend payment besides helps them to avoid expensive external adoptions. However Holder et Al. ( 1998 ) and Mollah ( 2002 ) indicated that many companies still pay high dividend, irrespective of their high operation and fiscal hazard. The ground is, these companies confronted high cost and used another fiscal resources to reconstruct money spent on dividend payment. Therefore, dividend might non ever reflect corporate position information to the market suitably. Fiscal factors Profitability and liquidness

Fiscal literature documented that profitableness has significantly positive impact on dividend place ( Fama and French, 2001 ; Al-Malkawi, 2007 ; Banga and Gupta, 2010 ) . However, there is a singular difference in dividend payment between companies in different markets. Glen et Al. ( 1995 ) indicated that dividend payout rates in developing states are approximately merely 70 % of those in developed states. Furthermore, companies in emerging market do non follow a stable dividend policy, dividend of a given old ages is determined by company profitableness for the same twelvemonth. For illustration, Wang et Al. ( 2002 ) compared Chinese companies to UK listed 1s, and noticed that Chinese companies had unstable dividend payments which to a great extent based on the profitableness of that twelvemonth, in contrast, UK companies has a clear dividend policy in which dividend increases yearly.

Before hard currency dividend proclamation, the Board of Directors had to concern about the house ‘s liquidness place. In some instances, a house may do good net income but still do non hold adequate hard currency ; and therefore may hold to prorogue or put dividend at lower rate. There is a nexus between liquidness and dividend payment as dividend payment cause hard currency escape for the company. If a company can keep a satisfactory long-run degree of liquidness, it would be able to keep stable dividend. Investing chances

Capital demand is a cardinal determiner to dividend policy. Kuwari ( 2009 ) recommended some account for the relationship between investing chances and dividend policy. First, companies prefer to utilize internal beginning to finance investing undertakings ; hence they choose to cut or cut down dividend when they have big investing chances. In contrast, when holding few investing chances, larger dividend payment is preferred. In these instances, dividend will play an incentive function: removing resources from the house and diminishing sunk costs caused by free hard currency flows ( Al-Malkawi, 2007 ) . Furthermore, it has been recognized that houses with big investing chances pay fewer dividend because they have lower free hard currency flows ( Holder et al. , 1998 ) .

The ability to entree to finance besides affect dividend determinations: provided the same degree of investing chances, a company with easier entree to external fiscal resource ( in footings of both how rapidly and cost ) can hold dividend determinations less dependent on its funding determinations compared with a limited entree company.

Anyhow, provided the same degree of investing chances, the attitude of direction may take to different dividend determination: direction with foresight and prudent attitude may maintain net income in the company to program for future investing chances, whereas broad attitude direction may give more generous dividend determinations. Tax

Tax affects a house ‘s dividend policy via impacting its stockholder ‘s penchants.

A house may hold both single and corporate stockholders, and these two category of investors are taxed otherwise. Black ( 1976 ) indicated that: for persons, since dividends are taxed more to a great extent than capital additions ( which are non taxed until realized ) , no-dividend is preferred. In the instance no dividend is paid, they can make home-made dividend by selling out some of there shareholdings. Although, corporate investors are taxed more to a great extent on capital additions, and tax-exempts investors are taxed on neither, but these group are overweighed by revenue enhancement paying persons. Lumby ( 1981 ) besides pointed out a job whether a house should take to set its dividend policy to convey the most favourable result to its bing stockholders, or should it follow a consistent dividend policy to pull another category of stockholders on whom its dividend policy has the least harmful revenue enhancement effects. Solving this job requires accurate rating of the cost and consequence for each option ( changed or unchanged dividend policy ) .

Supporting Black ‘s position, Abeyratna ( 1994 ) argued: a tax-paying investor can merely hold a well-diversified portfolio of high and low dividend portions if all these portions bring him the same after revenue enhancement return. In the state of affairs that returns on high dividend portions are taxed more, investors will anticipate a higher rate of return from these portions ( as a compensate for revenue enhancement on their dividend income ) and this cause high dividend portions to be sold at a monetary value relation to their low dividend opposite numbers.

Therefore, when dividend is to a great extent taxed, small or no dividend is preferred to investors, and corporations should set their payout policy consequently to fulfill them. Government policies and legal context

Changes in authorities financial and legal policies will unusually impact steadfast profitableness, and hence will impact dividend determinations. In some instances, authorities may delegate ordinances of dividend rate frame that companies have to follow. ( For illustration, harmonizing to “ Sec.205 Indian Company Act ” :

“ No dividend can be paid out of capital. It has to be paid out of net incomes of the company. If the company declares a dividend in surplus of 10 % , it is required to reassign a peculiar per centum of net income on skiding graduated table to the modesty fund. It can do usage of past accrued net incomes for payment of dividend topic to certain regulations issued by the Cardinal Government. ” )

Legal limitations aim to do certain that company capital is non reduced and the involvement of creditors and stockholders are protected. La Porta et Al. ( 2000 ) studied on states with high legal protected and found that fast turning companies paid lower dividend, as the stockholders were good protected, they can wait to have dividend if the company need finance for undertaking investings. Conversely, in low legal protection state, companies tend to pay out big dividend to keep their repute. Besides, in some instances, companies are engaged with committedness they made with creditors which stipulate limitations on dividend payment.

2. Impact of dividend proclamation on portion monetary value

2.1 Irrelevance proposition

It is believed by many bookmans that dividend proclamation contains no sensitive information as it is irrelevant and has no impact on stockholder ‘s wealth. The most well-known theorem of this mentality is the Miller and Modigliani theorem of dividend irrelevance ( 1961 )

Regarded by Villamil ( 2010 ) as a “ basis of finance ” , the MM theorem applies for both big corporations and entrepreneurial houses. Basically, MM theorem suggested that: in an efficient market, the value of a house is irrelevant to how it is financed, presuming that:

Tax is absent

Transaction cost, bureau cost and bankruptcy cost are absent

Access to finance is the same to all investors at the same involvement rate

Access to information is the same to all investors

Investor are apathetic between dividends and capital additions

Originally, MM theorem was proven under revenue enhancement absence status. It suggested that, if two house which are indistinguishable except for their fiscal construction: one is financed wholly by equity ( un-geared ) , and the other partially by debt, they should hold the same value. The ground for this is, presuming that an investor is sing purchasing on of those two houses ; he can either buy all the portions of the equity-based house, or borrow an sum of money equivalent to the other house ‘s debt. Two options should convey him the same cost and the same returns.

Subsequently on, this proposition is extended under revenue enhancement status. Now if the investor ( mentioned above ) wants to purchase the geared house, he will hold to pay an excess sum of money which is tantamount to the revenue enhancement rate times the value of debt. This means that there are advantages for house to be geared, as involvement payment can assist lower revenue enhancement payments, but dividends are non. However, when a house is extremely geared, it may look riskier in creditor ‘s eyes and hence they might necessitate higher return, which is a disadvantage for the house.

Hence, MM theorem suggested that it does non count whether a house finance itself by publishing portions or selling debts, and what its dividend policy is ( provided that the above premise applies ) .A house which has plentifulness of NPV undertakings but still take to pay dividend should non be aching its stockholders, because it can easy publish new portions to finance those undertakings. Stockholders will be willing to pay a just monetary value for new issues because premises has been made that there are no asymmetric information ; no issue, underwriting, agent ‘s and any other dealing cost. On the other manus, if a house choose non to pay any dividend at all, stockholders can still make their “ homemade dividends ” by selling out some of their portions to other investors at a just monetary value with the extra value from the undertakings taken into histories ( with the absence of dealing cost ) ; ( Arnold, 1998 ) .

MM theorem has certain restrictions, particularly because of its premises which can non be obtained in existent word. DeAngelo and DeAngelo ( 2006 ) pointed out “ the irrelevancy of the MM dividend irrelevancy theorem ” when bureau cost and stock bubbles exist. Black ( 1976 ) besides had argued that houses should pay small or no dividend to stockholders one time payouts are taxed. Furthermore, MM hypothesis is built on the footing that investors are rational when taking determinations, which is non appropriate in position of behavioural finance. Another restriction is that, MM theorem regarded hard currency dividend and capital addition are tantamount, but in fact they are non, as hard currency dividend is the hard currency in manus without any uncertainness hazard, whereas capital addition is the hard currency in the hereafter with considerable hazard ( Saedi, 2010 ) .

However, Villamil ( 2010 ) appreciated MM theorem for puting conditions for arbitrage: when factors such as impact of revenue enhancement, dealing cost, and asymmetric information and bound entree to finance are minor, “ investors can costlessly retroflex a house ‘s fiscal actions and “ undo ” house determinations. ” He besides concluded that, despite its restrictions, MM theorem merit monolithic recognition for supplying foundational background for modern corporate finance surveies.

2.2 Signing theory

Signing theory suggests that dividend convey information to the market. Saedi ( 2010 ) asserted that “ the addition in the hard currency dividend rate is an effectual agencies of presenting information to investors because rivals can non follow the company ‘s policy unless they have the same capacity to accomplish future net income ” .

In the antecedently mentioned MM theorem, one of the premises was that the entree to information is the same to all investors. As they have indistinguishable ability to understand and analyse the standard information, their mentality about the company should be the same. Furthermore, there should be no different between the outlook of stockholders and directors about the future betterment of the company, as they have the same information. However, in pattern, asymmetric information causes different understanding about the house ‘s future public presentation and hazard, taking to their different outlook. As directors ever have more elaborate, accurate and updated information than external investors, they may utilize hard currency dividend as a mean of conveying information to external investors to cut down the spread of asymmetric information. This will ensue in greater demand for the house ‘s portion, and hence set positive impact on the company ‘s market value and stockholder ‘s wealth ( Saedi, 2010 ) .

Previous surveies besides support signaling theory by reasoning that: portion monetary value of a house has positive reaction to sudden and unexpected hard currency dividend addition ; and negative reaction to hard currency dividend lessening. Additional statement was that merely when a house is confident about their hereafter net incomes, that this net incomes is adequate to cover the new higher dividend degree, so dividend addition will be announced. Ross et Al ( 1999 ) indicated that houses with no positive outlook about future public presentation will by no manner declare an addition in dividend, as the cost of this may go a load for them, and this overweight the positive consequence of dividend addition to its portion monetary value. Therefore, decision can be made that: dividend alterations are an index of future public presentation.

However, contradictors claims that hard currency dividend may non be the best manner of information transmutation. Announcement of alterations in dividend rate may supply unintelligible and deceptive signals, unless investors have the ability to separate between turning firms- that tend to retain net incomes for future investing in positive NPV undertakings, and those that have run out of investing thoughts and chances, hence had to administer their earning in signifier of dividend. Saedi ( 2010 ) provided the undermentioned illustration for this statement:

+ When Florida Power & A ; Light ( a Florida based power public-service corporation house ) announced a 32 % decrease in their first one-fourth dividend, its portion monetary value reduced every bit much as 20 % . After that, investors found that this was due to an betterment scheme instead than expected future fiscal troubles, the portion monetary value rise up once more but rather bit by bit.

+ If a company is turning good with monolithic thoughts and chances of future investings, but yet choose non to administer dividend, so their no-dividend policy may be regarded as a negative index, which later lead to a lessening in portion monetary value.

Therefore, in order to understand signaling consequence theory suitably, the followerss should be made clear. First, stockholders appreciate dividend addition non merely because of their hard currency penchant, but besides due to the information content of dividend. Second, portion monetary value reaction is non caused by information that dividend brought, but by the market outlook of the house ‘s future public presentation. Empirical surveies ( such as Denis et Al, 1994 ; Yoon and Starks, 1995 ) examined signaling theories with different attacks ; either examined the impact of dividend proclamation entirely or its interaction with gaining proclamation and stockholder penchants for hard currency. Although their methodological analysis differed, they all asserted that dividend information contribute to stock monetary value reaction.

The inquiry of whether or non hard currency dividend is an efficient mean for the house to present information to stockholders and via this improve portion monetary value have more than one reply. For little houses, this might be true as they do non hold sufficient agencies to pass on with their stockholders. However, for big houses, pass oning and signaling might be achieved via other agencies such as printing audit and analytical studies. This may hold the same signaling impact but cost much less than dividend- which is regarded as a “ money firing signal ” ( Bechmann & A ; Raaballe, 2010 ) .

2.3 Previous empirical surveies

The impact of dividend proclamation on portion monetary value has drawn the attending of legion research workers. Assorted research methods have been carried out to analyze the reaction of portion monetary value to dividend declaration, and research consequences revealed assorted grounds.

2.3.1 International findings Market reaction


Petit ( 1972 ) tested the unnatural return around the dividend proclamation utilizing informations of 625 companies in the NYSE from 1964-1968. There was about 1000 dividend proclamation and his decision was: the market reacts chiefly to important alterations in dividend. In efficient market, current portion monetary values reflect all the information published hence information conveyed by dividend alterations was quickly impounded into monetary values.

Analyzing on the Nipponese market during the period 1988-1993, Conroy, Eades and Harris ( 2000 ) found the important interaction between gaining and dividend proclamation on market reaction: earning proclamation sends out important information to the market, and dividend is an extra mechanism of signal.

McCluskey et Al ( 2006 ) examined 50 companies of the Dublin Stock Exchange from 1987 to 2001 and found a statistically important market reaction on the dividend proclamation twenty-four hours, which means that dividend is of import to Irish investors. However, when dividend and gaining information are published at the same clip, so “ gaining signals appear to hold a stronger impact on equity value ”

Recently, Vazakidis and Athianos ( 2010 ) exmined the reaction of Grecian stock market to dividend proclamation. They observed 60 companies listed in the Athen Stock Exchange over the period 2004-2008, and found the being of unnatural activity in the stock market both before and after the dividend proclamation day of the month. He regarded the absence of dual revenue enhancement in the Grecian stock market ( in contrast with the USA and Europe ) as a ground for this dissimilar market response.


In 1974, Black and Scholes examined 25 investing portfolios from the companies listed in the New York index from 1931-1966 ; and they found that dividend addition was non expected to impact portion monetary value. Impermanent alterations in monetary value might go on after dividend proclamation if the market regards it as a positive index of future earning, but when things become clear the portion monetary value will automatically set itself consequently.

Watt ( 1973 ) examined the relationship between dividend alterations, hereafter earning and unnatural return utilizing informations of 310 houses over 23 twelvemonth period from 1945 to 1968, and concluded that: “ the relationship between the unexpected alteration in dividend and the alteration in future earning is positive on the norm. However, the relationship is barely general or by and large strong ” ( on page 201 ) . He besides found no unnatural return around the dividend proclamation month, as “ the difference ( in unnatural monetary value index ) is non adequate to cover the dealing cost of operating on the information which might be doing it ” ( on page 207 ) .

Peter ( 1996 ) observed dividend outputs of companies on the S & A ; P 500 and asserted the cogency of MM theory by reasoning that: if companies do non pay out any dividend over a long clip, there should be really few or no impact on its stockholder ‘s wealth.