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Manyinvestorsmaypreferahighdividendpayout ratio

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Unformatted text preview: tant and high cash flows will prefer to invest in companies offering a high dividend pay‐out ratio. 34 Some Real World Factors Favoring a High Payout Tax and legal advantages: Corporations get a significant tax break on dividends from stocks held in other companies (as high as 70%). This tax exclusion does not apply to capital gains Tax disadvantages of a high dividend pay out is irrelevant to tax‐exempt investors Tax‐exempt investors like pension funds, endowment and trust funds are some of the largest investors in the economy 35 Some Real World Factors Favoring a High Payout Managers of trust and pension funds have a fiduciary responsibility to invest money prudently It is considered imprudent by the courts of law tobuy shares of companies which have not established dividend record University endowment funds and trust funds are frequently prohibited from spending the principal Such institutions may prefer a high dividend pay‐out as it affords an ability to spend 36 Some Real World Factors Favoring a High Payout Agency problems and management incentives: Investors of mature, high cash flow companies with few profitable investment opportunities may fear managers using the cash flows imprudently They would rather have them return the cash through higher dividend pay‐outs Dividends may be valued not for themselves but because they signal a more value‐oriented investment policy 37 Clientele...
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This note was uploaded on 04/09/2012 for the course FINN 321 taught by Professor Farahsaid during the Spring '12 term at Alvin CC.

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