4. Dividend Policy

Question 1

Procedure for paying dividends

Answer 1

1. Declaration date: board declares a payment of dividend
2. Cum-dividend date: the last day that the buyer of a stock is entitled to the dividend
3. Ex-dividend date: the first day that the seller of a stock is entitled to the dividend
4. Record date: firm prepares a list of all individuals believed to be stockholders as of that date
5. Payment date

Question 2

Dividend irrelevance theory

Answer 2

• A firm’s total market value is independent of its dividend policy
• Investors can always create their own dividend policy, by selling and buying their stocks, through homemade leverage

Question 3

Why do companies still pay dividend instead of share repurchases?

Answer 3

• Clientele effect
• Information content
• Agency costs

Question 4

Clientele effect

Answer 4

• Different groups of stockholders prefer different dividend pay-out policies
• For example, pension funds prefer a steady flow of dividends

Question 5

Information content

Answer 5

• Managers hate to cut dividends

- Therefore, they will make sure, before they raise dividends, that they can sustain their dividend payments

Question 6

Agency costs

Answer 6

• Dividends are a disciplining tool
• They are an instrument in the hand of shareholders that leads managers to pay cash when investment opportunities are low

Question 7

Paper - Von Eije
Paper investigates dividends and share repurchases of European firms
Main findings

Answer 7

• The last few years, the amount of firms paying dividends is declining, while the amount of dividend paid increased
• Quarterly reporting firms are more transparent. Such ‘good guys’ are likely to pay out more to shareholders
• Large and older firms are more likely to pay higher dividends
• Firms with a higher book-to-market ratio are less likely to pay dividends
• Firms with lots of cash are less likely to pay dividend, but when they do, they pay larger amounts.