Does dividend policy affect firm share price

Does dividend policy affect firm share price - DIVIDEND...

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DIVIDEND POLICY: THEORETICAL VIEW AND FIRM VALUE Prepared by: NOR FARA SHAHITRAH BINTI KAMAL 2015549097
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WHAT IS DIVIDEND? Dividend have been define as income that are gain from issuing share and; dividend are based on company profit, dividend will be distribute to their shareholder as a return for their investment. A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock , or the lowest amount that it can be bought for.
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Theoretical View Relevance theory Bird in Hand Theory Signaling Hypothesis Agency Costs and Free Cash Flow Hypothesis Tax-Effect Hypothesis Irrelevance theory
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Dividend Irrelevance Theory (Miller & Modigliani, 1961) Whether dividend was being paid or not to shareholders, are irrelevance with share prices. The distribution of dividend does not affect share price decrease Miller & Modigliani make two assumptions; perfect capital market with perfectly rational investors “…the value of a firm is basically determined by the firm’s investment and financing decisions. Dividend decision has no role in increasing or decreasing the value of the firm…” (Vidhya & Mohanasundari, 2016) (p.62).
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Bird in Hand Theory In 1962, Myron Goldon and John Lintner developed the bird in the hand theory. They argue that dividend payout and the firms’ value are related with each other Evidence from (Vidhya & Mohanasundari, 2016) They study about how NASDAQ firm which pay their cash dividend regularly as their dividend policy and does it have the relationship with firm value Result; agree that their dividend policy affect the share price which also reflect the firm value
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Signalling Hypothesis The hypothesis highlight that there are asymmetric information between managers and shareholders To eliminate information gap between manager and investor, (Vidhya & Mohanasundari, 2016) discuss that they are using dividend declaration as a signal about firm performance in the future The announcement regarding cash dividend can be signal changes on manager expectation on the future prospect especially when on imperfect market Announcement on dividend will lead to shareholders reaction (Ali & Chowdhury, 2010; Benartzi, Michaely, & Thaler, 1997)
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