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Applying Relevant Theories on why Investors Want Dividends
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Journal Article
Applying Relevant Theories on why Investors Want Dividends
2008
Overview
Taking in consideration the term usually refers to cash paid out of earnings, this paper develops in a new place a test of different theories related to why investors want dividend. By allowing stockholders at Amman Stock Exchange Market of Jordan to participate in answering a questionnaire, it becomes possible to determine theories applicable to stockholders ' behavior, or others that are not applicable. It is found that cash dividends can be used to reduce uncertainty, a clientele effect, and as a tool of signaling. At the same time, investors refuse the theories of relevancy, free cash flow hypothesis, and specific tools of agency cost. Interestingly, this result is significant to high top management in deciding its dividends policy or maximizing stockholders interest. For those who belief in irrelevancy theory, dividend payout policy has no effect on the value of the firm, stockholders will not be better off if the firm increases its payments. The question is should the firm pay out a large percentage of its earnings now or small (or even zero)? Is with the same answer of no matter. When dividend regarded as signals, management can use it to convey their optimistic massages cheaply to allow for the changes in their policy provide information regarding the future prospects of the firm. In this case, shareholders consider the world irrelevant in terms of maximizing values but it is remain a valuable source of information. For those who like the firms that pay hard cash, there is something to say for cash in hand more valuable over the hope of future profits. Those firms should strive to maintain an uninterrupted record of dividend payments, or avoid its increases to the level that might have to be rescinded in the future. For shareholders who view cash dividends as a reliable predictor of the firm's future prospects, its initiations or increases reveal information regarding changes in firms risk. Therefore, managers need to know how beta, unsystematic risk and dividend clienteles may explain more of the market reaction to its increases.
Publisher
المنظمة العربية للتنمية الإدارية
Subject
