Dividend Policy

By



ACKNOWLEDGEMENT

I would like to take this chance for thanking my research facilitator, friends & family for support they provided & their belief in me as well as guidance they provided without which I would have never been able to do this research.



DECLARATION

I, (Your name), would like to declare that all contents included in this thesis/dissertation stand for my individual work without any aid, & this thesis/dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views & not essentially which are associated with university.

Signature:

Date:

ABSTRACT

Owners of successful privately held businesses are eventually faced with a fundamental

dilemma that the business becomes increasingly successful, decisions must be made concerning

how to handle accumulating profits. At the outset, there is usually no choice other than to reinvest for growth. However, as time goes on, retained profits are often used to retire debt and then left to accumulate in the business. After a while, business owners can fall prey to their own success, become complacent, and fail to recognize the risks associated with leaving profits in the business. Advisors need to help their business owner clients recognize that the risks associated with accumulating excess profits in the company can outweigh the benefits. These risks can be characterized as risk management, leverage, disposition flexibility, and income taxation.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background and Motivation of the study1

The contribution of the study2

Structure and Scope of the study5

Limitations of the study6

CHAPTER 2: DIVIDEND POLICY THEORETICAL FRAMEWORK7

The ceteris paribus assumption7

Capital Structure9

Imperfections: Taxes, agency, bankruptcy and transaction costs12

Static Trade-Off Theory13

Trade-off Theory and Pecking Order Theory14

Tax Shield14

Bankruptcy Cost15

Debt to Equity Ratio17

Dividend theories19

The transaction cost theory19

Tax theories21

The bird in the hand argument22

The signalling theory22

Behavioural models - The partial adjustment model25

Conclusions on the empirical studies of the Partial Adjustment Model27

Actual changes following the dividend change announcements29

CHAPTER 3: EMPIRICAL ANALYSIS32

Empirical procedures and results32

Problems of stakeholder theory to the management company32

Assessing the Relative Importance of Requests of Different Stakeholders35

The database40

Empirical Results & Analysis42

CHAPTER 4: CONCLUSION46

The Aim46

Key findings46

Actual changes following the dividend change announcements48

REFERENCES52

APPENDIX62

CHAPTER 1: INTRODUCTION

Background and Motivation of the study

Capital structure decisions rely on a complex array of theoretical foundations and practical considerations. At the managerial level, it is impractical to base decisions purely on theory. While one can develop a perception of an optimal capital structure, the decision is often obscured by practical limitations to the theoretical base. In order to be useful to practicing managers, policies and decision techniques need to be efficiently accomplished and based on available information. This paper provides that practical framework. We recount a simplified theoretical base for capital structure, highlight some of the problems encountered when applying the theory to reality, and suggest a framework for practical managerial decisions about capital structure.

This exposition is especially useful in undergraduate business curricula, in particular for finance majors considering professional management as a career. The typical capital structure theory exposition has become known since that time as a tradeoff theory. Tradeoff theory provides an exposition of the ...