Dividend policy

According to realised news from China’s stock regulatory body (2012), companies who has not paid dividend for 5 years will be forced to quit stock market. Because these companies have not given investors a value return expectation.

Dividend decision is the major corporate long term financial decision. And management can affect the shareholder wealth through the dividend decision. But dividend decision is least analyzed in financial decision making. As stated by Black(1976), dividend policy is the ‘Dividend Puzzle’. The complications come from the relativeness to both the investment and financing decisions. Therefore, it is difficult to investigate the dividend policy in isolations.

There are two problems in dividend decision. Does the pattern of dividend cash flow affect the shareholder value? If it does, which particular patterns of dividend cash flow would maximize the shareholder value.

The valuation model of equity depends on the present value of expected future dividend cash flow. Therefore, dividend decision is the determinant of equity value. But is it the pattern of the dividend cash flow or the magnitude of the dividend that affects the value of expected flow? This is needed to further investigate.

In fact it is still ambiguous whether dividend policy can affect shareholders’ worth. Some empirical evidence tends to suggest dividend decision is important, and the taxation on dividends should be taken into account. Besides, given the imperfection of capital market dividend decision should be with cautions. A company to maximize shareholder value may keep a constant dividend cash flow which can allow investors to judge their desirability and have clear investment goals.