Analysing the different types of Agency Cost theories

“ No Agency Cost ” was among the Irrelevance Proposition hypothesis premises ( Merton and Modigliani 1961 ) which assert that directors are full agents for stockholders without any defects. However, determinations taken by directors are non ever in the involvement of stockholders as many of them focus on personal involvements they are seeking to accomplish. Because stockholders are cognizant of this fact, they are developing agencies to command directors ‘ behaviours ( Jensen and Meckling 1976 ; Fama and Jensen 1983 ; Jensen 1986 ; Shleifer and Vishny 1997 ) .

The most common bureau costs are the costs of monitoring directors. The responsibilities undertaken by directors are much and frequently have quality a specialized and based on declarations that may non be understood by normal stockholders. Therefore, it is highly hard for them to command directors ‘ public presentation. As such, the presence of an efficient and specialised foreigner for monitoring directors ‘ public presentation on behalf of stockholders would be more effectual. One of the agencies by which stockholders may fall back to an external party is external funding by increasing the hard currency dividends rate ( Rozeff 1982 ; Dempsey and Laber 1992 ; Schooley and Barney Jr 1994 ) to avoid maintaining big liquidness in the company. This would take directors to fall back to external funding, and therefore maintain the company under the control of external funding.

The points that contribute to do the high hard currency dividends policy a tool for monitoring and commanding the directors ‘ public presentation are summed up as follows:

This policy puts considerable force per unit area on directors to procure sufficient net incomes to be distributed for stockholders. In this regard, the directors do non wish to cut down the distributed hard currency dividends rate, as the unexpected and sudden decrease gives negative signals about the directors ‘ public presentation, and therefore the company ‘s future public presentation ( Dempsey and Laber 1992 ; Schooley and Barney Jr 1994 ) . The high paid hard currency dividends policy followed must take directors to redouble attempts to accomplish the needed hard currency dividends ratio to be distributed to stockholders.

This policy reduces the sum of hard currency at the directors ‘ custodies. This, in bend, would coerce them to fall back to borrowing to finance the company ‘s projects-something which stockholders prefer because it puts the company under the extra control of external moneymans ( Rozeff 1982 ) .

High hard currency dividends lead to cut down the high free hard currency available to directors which could be misused if there is free hard currency in big measures ( Easterbrook 1984 ) . This is apt to entice directors to pass this money in undertakings that may non hold been studied good. The being of big sums of free hard currency, after the company has exhausted all undertakings with positive net nowadays value, pushes directors to take one of two options: the distribution of these financess to stockholders or puting them in any manner merely to acquire rid of them as in the undermentioned illustrations:

To put in undertakings with a negative present value, although this policy is a misdemeanor of by and large accepted rules of investing. Jensen ‘s survey ( Jensen 1986 ) confirmed that many directors resort to take undertakings with negative present value instead than administer hard currency dividends to stockholders. This policy is common in oil and baccy companies. Furthermore, directors would fall back to such a policy to cut down their companies attractiveness least other companies should prehend them.

Purchase other companies: Amalgamations are normally made at monetary values higher than the market value. As amalgamations entail high costs, many research workers believe that the amalgamations may non be profitable for the company even when the procedure of integrating is carried out to accomplish right aims ( Roll 1986 ) . Therefore, companies tend to unify or buy another company instead than administering dividends to stockholders with the purpose of fulfilling the directors ‘ desires to increase the size and range of their imperiums and the range of their control. Such a inclination is non prone to win and therefore it constitutes some sort of bureau costs. The high hard currency dividends policy is considered as a agency to cut down the directors ‘ willingness for overinvestment ( Michael, Clifford et al. 1995 ) .

Buying of fiscal assets: For companies that have surplus hard currency for positive present value ( Easterbrook 1984 ) , the reinvestment scheme of these financess in fiscal assets depends on the stockholders personal revenue enhancement rates and the hard currency dividends revenue enhancement. If the personal revenue enhancement rate is lower than the hard currency dividends revenue enhancement rate, so to maximise the stockholders wealth requires administering dividends to reinvest them themselves. If the directors detain net incomes and reinvest them, so this would be considered one of the bureau costs that stockholders must set about.

In brief, the separation of direction from ownership leads to a struggle of involvement between directors and stockholders. Such a struggle would expose stockholders to extra costs called bureau costs which take several signifiers including directors control costs in order to guarantee their behaviour and public presentation or the costs of managers enlargement ( or overinvestment ) in order to maximise their belongingss through investing in some undertakings, unifying with other companies, the acquisition of certain companies or some signifier of investing in undertakings with negative present value position to do the company less attractive to investors who want to prehend it. The hard currency dividends policy can function as a manner of proctor and control over the directors ‘ public presentation with the purpose of cut downing the bureau costs. Through increasing hard currency dividends the company can be kept in demand of external support. Such a move is apt to maintain directors under the control of external moneymans. Besides, the increasing hard currency dividends would take to retreat hard currency from the directors ‘ manus, which reduces the likeliness of misapplying them. The form of hard currency dividends among companies can in consequence be justified by the tradeoffs between the costs of external funding and benefits of increasing the hard currency dividends and the ensuing decrease in bureau costs. This can ensue in an optimum dividends policy even if we ignore revenue enhancement considerations ( Rozeff 1982 ) .

2-4 Stock Dividends Policy

This policy consists of dividends distribution to bing stockholders. It takes the signifier of portions alternatively of hard currency ( Broyles 2003 ; Vernimmen and Quiry 2009 ) . The company normally resorts to this policy when it is in a rapid growing stage or restructure, so that these phases would necessitate a big capital outgo actuating the company to keep all possible liquidness to accomplish this purpose ( Watson and Head 2004 ) .

In the accounting procedure, portion dividends policy is the transportation of financess between equity histories ( Levy and Sarnat 1994 ) . It does non include any outside hard currency flows ; hence, the stockholders do non have anything in fact ( Gitman 1997 ) . This is due to the fact that the market value per portion, after the portion dividend proclamation, will travel down. But the entire stockholders ‘ wealth will non be affected because the figure of portions owned will be increased to cover the diminution in market value per portion ( Gitman 1997 ; Arnold 2008 ) . Besides, the volume of the company ‘s stockholders control would non be affected, because the equity per centum of stockholders will non be affected because the procedures of portion dividends are in the same per centums of old equity ( Van Horne 1983 ) . Equally long as the rate of company ‘s returns is fixed, the rate of return per portion will worsen due to an addition in the figure of portions with the stableness of the overall rate of return. The entire stockholders ‘ gross, nevertheless, will non be affected owing to the addition of the figure of portions owned by stockholders to counterbalance for the diminution in dividends per portion. Besides, it is non expected that the portion dividends policy would hold any impact on the company ‘s value every bit long as the investors understand that the keeping of hard currency dividends alternatively of portions is for the interest of reinvesting this money and non because of fiscal troubles or to run into outstanding payments ( Watson and Head 2004 ) .

Normally, the portion dividends policy is looked upon as portion of the general dividends policy ( Broyles 2003 ) . But, in world, it is no more than a little split, as the portion dividends lead to increase the figure of portions issued without impacting the company ‘s hazards, grosss or hard currency flows ( Van Horne 1983 ) .

There are several surveies on the portion dividends policy impact on the company ‘s market value, and accordingly on the stockholders ‘ wealth. These surveies have come to the undermentioned decisions ( see: Barker 1958 ; Fama, Fisher et Al. 1969 ; Chottiner and Young 1971 ; Woolridge 1983 ; Grinblatt, Masulis et Al. 1984 ; Lakonishok and Lev 1987 ) :

Normally companies ‘ portions monetary values lift instantly after they announce the portions dividend.

The portions dividends procedure has an information content understood by investors in a certain manner. The ground portions monetary values addition of companies that announce these dividends is non due to the stockholders ‘ penchant of portions to hard currency. It is, so, the information content of the portions dividends that may give a positive signal about the degree of future net incomes expected by the directors of these companies. Added to that, the companies ‘ directors who believe that future net incomes will be better than current net incomes are the lone companies that distribute the portions. On their portion, investors are cognizant of this fact ; they, hence, inquire for these portions of the companies which distributed the portions non choosing for extra portions which do non impact the company ‘s value, but for the content of information engendered by such a procedure.

If the companies that have announced portions dividends do non increase hard currency dividends during the short period following the portion dividend proclamation, their portion monetary values will travel down to make the degree it used to keep before the portions dividends proclamation

The portions dividends procedure leads to increase costs associated with gross revenues and purchases ( Ross, Jaffe et Al. 1999 ) , as fees and committees are charged by agent absolute sums if the values attributed to the original purchaser or gross revenues are higher when the original monetary value lessenings. Besides that, the border between the merchandising and buying monetary values as a proportion of the gross revenues or purchase assets monetary value is higher whenever the assets monetary value lessenings. This means that covering in low monetary values portions is more dearly-won than covering with high monetary values if the fees and committees sums are absolute. As the portions dividends policy leads to a diminution in stock market value per portion, this may take to low liquidness of these portions because of the comparatively high cost. However, the portions low monetary value increases the figure of investors who have the ability to purchase these portions, more than could take to increase liquidness.

Grinblatt and others in their survey in 1984 give two grounds for portion monetary value addition of the companies that make portions dividends on stockholders ( Grinblatt, Masulis et Al. 1984 )

There is an ideal monetary value for the companies ‘ portions monetary values and that most companies believe that this monetary value is confined between $ 20-50. The companies believe that investors look for stocks with a monetary value less than 20 as being at hazard and causes concern. At the same clip, they look for stocks with a monetary value higher than 50 as being of a high monetary value. Therefore, these companies try to maintain the monetary values of their portions within that scope through a portion dividends policy seeking to cut down the market ‘s value per portion.

The importance of information content to the portions dividends procedure to stockholders. Although the nature of the information issued by the portions dividends is non wholly clear, the survey besides states that the distribution procedure purposes at raising inquiries about the company on the portion of fiscal analysts, taking to the find of information that the direction ever tries to present to investors.

Brennan and Copeland gave in their survey ( 1988 ) an reading of the information content contained in the portions dividends as follows: Assuming that directors have more precise information on the company ‘s hereafter position more than the investors, and presuming the being of two companies ( a ) and ( B ) similar in everything except in the director ‘s outlooks for future public presentation of the company which is managed by the manager of company ( a ) . He knows that the company ‘s public presentation in the hereafter will be better than the expected public presentation, while the current manager of company ( B ) thinks that the company ‘s public presentation in the hereafter will be the same as the current public presentation. Harmonizing to the survey, the two managers know if they would make up one’s mind to administer the portions, the stockholders will bear the extra costs associated with the distribution of portions. The company ‘s manager ( a ) knows that the company is on the brink of a better hereafter compared with the current state of affairs. Therefore, he may be given to administer portions to stockholders on status that net incomes should cover the extra hereafter costs associated with this procedure. The manager of company ( B ) knows that the future public presentation will stay within the current state of affairs, and therefore the procedure of portions distribution will take to increase costs without a return to cover these extra costs. Consequently, the distribution of portions dividends of company ( a ) to stockholders makes them look into this process as extra hereafter net incomes to cover the extra costs ensuing from the portions dividends. This practically leads them to bespeak the purchase of portions of those houses and consequence in increased demand for its portion with the endurance of the stable supply, taking to increasing monetary values and hence the company ‘s market value.

The ground for the monetary value addition, as shown by the survey ( Brennan and Copeland 1988 ) , was non the desire of stockholders in stock dividends, but instead what intend this procedure carries out of which investors understand that the company expects to execute better in the hereafter than the current public presentation. It is unreasonable that company ( a ) would bear down extra costs due to portions distributions if they are non cognizant that future returns will be greater than the current 1s so as to counterbalance these costs.

2-5 Shares Repurchase Policy

The company ‘s portions repurchase to go exchequer portions is one of the most known options for the net income dividends. There following are the methods prevalent among companies to purchase back portions ( Gitman 1997 ) :

Repurchase Tender Offer

Open Market Purchases

Repurchase by Negotiated Basis

1- Repurchase Tender Offer

There are many empirical surveies dealt with stock redemption by stamp offer ( see: Masulis 1980 ; Dann 1981 ; Vermaelen 1981 ; Vermaelen 1984 ; Dann, Masulis et Al. 1991 ; Chhachhi and Davidson 1997 ) . In stock redemption by stamp offer, the company announces its desire to buy a figure of portions at a fixed monetary value during a specified period of clip. If there is no adequate figure during the specified period, the company might fall back to widen the period or call off the offer. This method is used when the company needs a big measure of portions.

2. Open Market Purchases

There are many empirical surveies dealt with stock redemption by unfastened market ( see: McNally 1999 ; Baker, Powell et Al. 2003 ; Liano, Huang et Al. 2003 ) . In unfastened market stock redemptions, the company tends to buy back its portions through the Stock Exchange at the market monetary values. This method enables the company to take both the monetary values and the appropriate times to purchase back portions as it gives the company greater flexibleness in choosing the appropriate times, Numberss, and monetary values. Furthermore, this method is used to re-purchase in instance of re-purchasing little measures.

3. Repurchase by Negotiated Basis

The company here separately negotiates with some particular stockholders to acquire to certain monetary values through which the company can buy those stockholders ‘ portions. Although this method is non normally observed, yet it is used to command and acquire rid of some stockholders who cause problems to the direction

Recently, the portions repurchase policy increased as an option to the hard currency dividends policy ( Asquith and Mullins 1986 ) due chiefly to its distinguished features in comparing with the hard currency dividends policy. The followers are some of these features ( Damodaran 1997 ; Copeland, Weston et al. 2005 ) :

The hard currency dividends distributed to stockholders represent a load on the company and its direction where the direction finds itself bound by go oning to hold this figure on an one-year footing. Any decrease in that per centum leads a negative impact on the company ‘s value because of the information content inherent in hard currency dividends. However, buy backing portions are looked upon as an alternate to hard currency dividends and besides as a hard currency return which is non traveling to repeat. Companies that do non anticipate to go on to do net incomes in the same degree prefer the buy backing method alternatively of administering hard currency dividends to stockholders so as non to perpetrate themselves to follow the same method in the coming old ages.

The being of a big offer of the company ‘s portions in the market without a demand covering this offer to cut down the monetary values of the company ‘s portions and maintain them low. The company ‘s buy backing stock policy leads to an option to the hard currency dividends to acquire rid of the excess portions offer so that there will be no stockholders in the company but those whose portions willing to retain its portions. Such a procedure leads to a rise in the portions monetary values due to the reduced offer, therefore positively impacting the company ‘s market value and stockholders ‘ wealth.

When the company wants within a short period of clip to alter the capital construction to make the optimum mix with the purpose to cut down the funding costs, the redemption policy serves as an effectual agencies to accomplish this purpose. When the equity fund additions in the capital construction more than the optimal ratio, it leads to increase the fiscal costs ; hence the repurchasing policy operates to cut down equity financess in the mix by cut downing the figure of portions issued and geting at the optimum mix and therefore to cut down fiscal costs.

Buying back stock policy as an option for hard currency dividends protects stockholders from wealth harm because of exposure to revenue enhancements imposed on dividends ( Copeland and Weston 1988 ) . Since the revenue enhancements imposed on hard currency dividends in most states of the universe ‘s are highest than revenue enhancements on capital additions, the bargain back portions policy seeks to extenuate the impact of revenue enhancements on stockholders ‘ wealth through the transition of hard currency dividends to capital additions. This occurs merely if stockholders sell their portions and procure capital net incomes

There is positive information content of the portions buy backing policy when the company wishes to purchase portions ( Dann 1981 ; see: Vermaelen 1981 ; Asquith and Mullins 1986 ; Ofer and Thakor 1987 ; Constantinides and Grundy 1989 ; Damodaran 1997 ; Grullon and Michaely 2004 ) . In response to this, the investors understand that the company portions monetary values are undervalued. The direction, which is to the full cognizant of this, tends to purchase these portions. Such an apprehension of the bargain back portions proclamation leads to increase the investors ‘ demand for the company portions, which raises the market value. In their survey, Ikenberry and others ( Ikenberry, Lakonishok et Al. 1995 ) tested the information content of the purchasing back stock policy and concluded that the portions monetary values of companies that have repurchased their portions were better than the portions monetary values of similar companies that did non buy back their portions.

Buying back stock policy works to concentrate on commanding the company by cut downing the stockholders figure in the company ( Damodaran 1997 ) . This means that the stockholders who do non sell their portions will hold a greater portion of the company after each procedure of purchasing back portions.

The purchasing back stock policy plants on beef uping the monetary values of the company ‘s portions. After the prostration which struck the US fiscal market in 1987, companies sought to purchase their portions to cut down monetary value impairment by making a demand for portions and directing positive signals about the company. Some empirical surveies ( Dann 1981 ; Vermaelen 1981 ; Comment and Jarrell 1995 ; Ikenberry, Lakonishok et Al. 1995 ) happen grounds that directors repurchase portions when they believe that their houses portion monetary value are undervalue.

Due to the features of the purchasing back portions policy, the finance and economic system authors used to believe, until a short clip ago, in preferring purchasing back stock policy as an alternate to hard currency dividends policy, whether these dividends are regular or extraordinarily extra dividends ( Scholes 1972 ; Kolodny and Suhler 1985 ; Asquith and Mullins 1986 ; Masulis and Korwar 1986 ; Mikkelson and Partch 1986 ) . This is because this policy is flexible for the company and protective for stockholders from paying revenue enhancements on hard currency dividends. But when analyzing the signals emanating from the purchasing back stock policy, which might be understood by investors as non-valid, the affair is different. In this regard, companies that buy back portions as an alternate to hard currency dividends may give the feeling that these companies are unsure about the hereafter hard currency flows. Therefore, they do non wish to stay by the degree of hard currency dividends, and so may happen it hard to keep in future. This reading of the signals emanating from the purchasing back stock policy leads to a negative impact on the company ‘s market value even if it were non right.

Surveies ( see, Gustavo and David 2000 ; Fama and Gallic 2001 ) conducted on the purchasing back company portions policy as an alternate to hard currency dividends to stockholders concluded that the benefits of revenue enhancement turning away and positive information content, flexibleness and deficiency of committedness on the portion of the company to prosecute the purchasing back portions policy exceeded the harm caused by signals issued by these policies and which may be understood by stockholders in a non-valid mode

The purchasing back portions policy depends on the doctrine of cut downing the figure of issued portions, therefore cut downing the figure of claimant ‘s net incomes ( Damodaran 1997 ; Copeland, Weston et al. 2005 ) , which means increasing the net incomes realized per portion in instance the company used the net incomes earned or retained for funding purchasing back portions and without resort to adoption. If the company, on the other manus, tends to finance the portions purchasing back procedure through adoption financess, the net incomes realized per portion will increase because the adoption costs are less than portions bought. The company, nevertheless, should take into history the revenue enhancement shield of the involvements paid on the borrowed money so that the addition in the net incomes realized per portion is equal to the difference between the net incomes per portion for repurchased portions and the cost of borrowed financess to finance the redemption procedure taking into history the revenue enhancement shield divided by the figure of staying portions following the redemption. If the cost of borrowing is more than the profitable portions purchased, taking into history the revenue enhancement shield, the net incomes realized per portion will be less after purchasing back the portions.

There are, nevertheless, a figure of unfavorable judgments that can be directed to the purchasing back stock policy ( Brigham, L. et Al. 1999 ) :

There may be negative information content for the purchasing back stock policy. This policy might propose that the company is unwilling to be committed to a certain degree of net incomes, as the direction could be unsure of its ability to accomplish this degree of net incomes continuously.

There are a figure of investors that can non be neglected or underestimated, viz. those who would prefer hard currency dividends instead than capital additions, because they rely on it being a beginning for run intoing their consumer and investing demands. Therefore, the company ‘s acceptance of the purchasing back stock policy may force those investors to abandon their portions

When the company announces its desire to buy back portions, the stockholders who wish to sell their portions may bespeak a higher monetary value for the portions. Besides, the company ‘s petition for buying a big figure of portions at one spell would take to the creative activity of an unusual petition for portions, therefore taking to higher monetary values. This indicates that the company will pay a higher value than the existent value of the portions, ensuing in damaging the staying stockholders ‘ wealth.

2.6 Investing policy and a residuary dividend policy

The relationship between investing and hard currency dividends policy was established through the differing precedences of the usage of available financess ( Brigham, L. et Al. 1999 ; Lumby and Jones 1999 ) . In this regard, direction is seeking to accomplish high returns through the usage of financess available to them in assorted types of undertakings and investing chances available in instance these chances are attractive from an economic position ; in other words, if these investing chances engender positive hereafter hard currency flows. Stockholders, on their portion, do non oppose this attack provided that it has no consequence on grosss derived from hard currency dividends

The direction ever tries to follow the alleged residuary dividends policy ( West and Bierman 1968 ; Van Horne 1983 ; Arnold 2008 ) by giving precedence to investings on the hard currency dividends and administering the excess hard currency on investing. A batch of surveies have supported this tendency ; the most of import of which is M & A ; M ( Merton and Modigliani 1961 ) .

However, other surveies, e.g. Partington ( 1985 ) , province that companies in pattern separate dividends policy from investing policy, because the direction will finance their investing undertakings from hard currency dividends surplus fund – that means the precedence of hard currency dividend – and therefore financing the shortage of equity or adoption financess. Other surveies ( Ross 1977 ) reference that other companies may non follow this attack due chiefly to the being of motivations for administering hard currency dividend off from excess decrease of financess available, the most of import of which is to direct positive signals about the future fiscal place of the company.

2.7 Decision

There are three basic policies for general dividends policy:

– Cash dividends policy

– Share dividends policy

– Buying back stock policy

Furthermore, there are six basic theories for hard currency dividends policy

Irrelevance Proposition: The protagonists of this theory think that hard currency dividends are non related to the company market value, because the investor can do his ain dividends policy, irrespective of the policy adopted in the company

“ Bird in the Hand ” Theory: The protagonists of this theory think that the company market value will better if the company increases hard currency dividends because investors consider hard currency dividends as a “ bird in manus ” , while the capital additions are “ a sparrow on the tree “ .

Tax Effect Theory: The protagonists of this theory understand that hard currency dividends are exposed to a higher revenue enhancement rate than the capital additions revenue enhancement rate, so investors prefer companies that retain net incomes and supply them to investors as capital additions. Detention of the company ‘s hard currency dividends will take to maximise market value, as those protagonists believe.

Signing Effect Theory: Investors look into hard currency dividends as a positive index for the directors ‘ outlooks for both public presentation and the company ‘s future net incomes. Therefore, investors prefer to put in companies that distribute high hard currency dividends ; the company can maximise its market value by increasing the hard currency dividends rate.

Clientele Effect Theory: The protagonists of this theory think that the company seeks to pull investors who see that the company ‘s policy of hard currency dividends agree with their consumer and investing demands and besides their revenue enhancement place. As a effect, the hard currency dividends policy will non impact the company ‘s value because investors have chosen the company motivated by the specific policy adopted by it.

Agency Cost Theory: The protagonists of this theory think that hard currency dividends policy is an ideal means for cut downing costs originating from involvement struggles because of dividing the direction from ownership. In so making, the company can maximise the market value by cut downing bureau costs through increasing the hard currency dividends per centum.

Analyzing theories, one could easy observe that they provide conflicting and contradictory advice for directors, which affect their responsibilities to increase the company ‘s value and thereby maximising the company proprietors ‘ wealth. The inquiry to be raised here is: which one of these theories must be followed to positively act upon the company ‘s value? Several experimental surveies have been conducted to prove these theories and to determine their practicality. The consequences of these surveies, nevertheless, were non clear in preferring or prefering any of these theories. This can be attributed to the undermentioned grounds:

Statistically, these surveies assume stableness of other factors impacting the company ‘s value. That means the companies surveies were similar in everything except the dividends policy. This premise is unrealistic in pattern

The absence of a mechanism for finding, mensurating and calculating ownership cost accurately: as the being of indistinguishable companies in all factors that affect the company ‘s value and different merely in the hard currency dividend policy is something impossible, and due to the trouble of finding ownership accurately, it is hard to find the relationship between the hard currency dividends policy and ownership costs, and hence cognizing the impact of dividends policy on the company ‘s value.

The absence of a consentaneous understanding among investors on one hard currency dividends policy penchant: there is a group of investors who strongly prefer high hard currency dividends and besides prefer net incomes as hard currency dividends. At the same clip, there is another group of equally-important investors who strongly prefer low hard currency dividends and prefer net incomes as capital additions. These different investors ‘ penchants explain the trouble of finding an optimum hard currency dividends policy and hence prefering the specific theory. Despite difference in the consequences of these surveies on investors ‘ penchants and hence finding the policy through which the company ‘s value can be maximized, the surveies nem con agreed that investors prefer any dividends policy that is stable and clear, which makes it easy for investors to foretell, irrespective of the policy followed itself.

It can be said, harmonizing to the agreed- points among these theories, that hard currency dividends policy is a tradeoff between the injuries caused to its net incomes as a hard currency and the benefits of giving signals, and the full security of hard currency dividends when accepting the hurts shoulder ensuing from revenue enhancements.

From a strictly accounting point of position, the portion dividends policy is in fact no more than a fund transportation between equity histories without impacting the entire wealth. Yet, the dividends policy may good be looked at from another position as a agency of low-priced bringing of positive information to investors about the company ‘s future public presentation, and besides as a agency to maintain the portions monetary value available for a larger figure of investors through a decrease in the market value per portion due to an addition in the figure of portions, and this leads to increase the liquidness of portions

The purchasing back policy can be used as an option to the hard currency dividends policy being flexible to the company and protective to stockholders from the amendss caused by revenue enhancements on hard currency dividends and positive information content of this policy.

On the other manus, we find some connexion between the hard currency dividends policy and the investing policy, as some companies tend to administer the inordinate financess available to it after wash uping all investing chances as it adopts the residuary dividend attack, while others do non follow this attack because there is no nexus between the two policies.