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Dividend Policy

 Self-Paced Overview

Investors and Dividend Policy

 

Information Content or Signaling

Signaling hypothesis says that investors regard dividend changes as signals of management's earnings forecasts.

Clientele Effect

The clientele effect is the tendency of a firm to attract the type of investor who likes its dividend policy.

Free Cash Flow Hypothesis

All else equal, firms that pay dividends from cash flows that cannot be reinvested in positive net present value projects (free cash flows), have higher values than firms that retain free cash flows.

Dividend/Retained Earnings Decision

There are various constraints that may impact on a firm's decision to pay out earnings in the form of dividends.

Considerations:

  • Cash flow constraints
  • Contractual constraints
  • Legal constraints
  • Tax considerations
  • Return considerations

Types of Dividend Policies

Policy Types:

  • Constant Dollar Dividend Policy
  • Constant Payout Ratio
  • Regular with Extras

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