lta_2001_01_a3 - LTA 1/01 P. 58 9 7 SEPPO KINKKI Dividend...

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58 LTA 1/01 • P . 58–97 SEPPO KINKKI Dividend Puzzle – A Review of Dividend Theories * ABSTRACT Dividend policy has been one of the areas of corporate finance to be analyzed with a rigorous model, and it has since been one of the most thoroughtly researched issues in modern finance. There are a number of theories of dividend behaviour, and empirical studies provide little evidence for one over the other. Also the conceptions concerning corporate dividend theories are different. The main part of the discussion is related to the evaluation of financial research, because at all times researchers have tried to solve the dividend puzzle by using new theories and insights. Key words: Dividends, value of the share, agency theory, information content, signalling, clientele effects, ex-date effects 1. INTRODUCTION In finance, there are some areas, which have puzzled researchers. One of them is the dividend behaviour of firms. Along with capital structure, dividend policy has been one of the first areas of corporate finance to be analyzed with a rigorous model, and it has since been one of the most thoroughly researched issues in modern finance 1 . In spite of this, much remains unex- * The author wish to thank Harri Seppänen, Pasi Sorjonen, Leo Virtaneva and an anonymous referee for very useful comments on earlier drafts of this paper. Financial support for the research from the Liikesivistysrahasto is gratefully acknowledged. 1 According to Frankfurter–Philippatos (1992) the subject of dividend policy has created a voluminous literature of its own and a handful of theories have been offered to resolve the inherent paradox of dividend payments to SEPPO KINKKI, Lic.Sc. (Econ), Principal Lecturer Helsingin liiketalouden ammattikorkeakoulu • e-mail: [email protected]
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59 D IVIDEND P UZZLE – A R EVIEW OF D T HEORIES plained concerning the role of dividends 2 . Black (1976 p. 5) epitomizes the lack of consensus by stating ”The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together.” Dividend policy determines the division of earnings between payments to stockholders and reinvestments in the firm. Managers’ task is to allocate the earnings to dividends or re- tained earnings. Retained earnings are one of the most significant sources of funds for financ- ing corporate growth. Corporate growth makes it eventually possibly to get more dividends. The goal of this study is to describe the discussion on dividends and dividend theories. The main part of that discussion is related to the evolution of financial research, because at all times people have tried to solve the dividend puzzle by using new theories and insights. There are a number of theories of dividend behaviour, and empirical studies provide little evidence for one over the other. The discussion has lasted over half a century, and as a whole, these studies are interested in the following questions: (1) Why do firms pay dividends? (2) How do they set their dividend policy? (3) Does dividend policy affect share value?
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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lta_2001_01_a3 - LTA 1/01 P. 58 9 7 SEPPO KINKKI Dividend...

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