For many years economists and financial experts have argued about the „dividend puzzle“, i.e. about the impact of dividends on stock prices. Describe this puzzle, explain why it appears so intractable, and state what might be done to bring us all closer to an acceptable solution.
Table of Contents
- The Dividend Puzzle
- Dividend Policy of a Company
- Modigliani and Miller (MM, 1961)
- Avoiding Dividends Theoretically
- Alternatives to Dividend Payments
- The Impact of Taxes
- The Signalling Function of Dividends
- Behavioral Finance Approach
- Desire for Steady Current Income
- Pros and Cons of Paying Dividends
- Concluding Thoughts
Objectives and Key Themes
This paper aims to delve into the "dividend puzzle," a topic of long-standing debate among economists and financial experts. It aims to examine the complex relationship between dividends and stock prices, explain why this puzzle persists, and explore potential pathways to a more comprehensive understanding.
- The Impact of Dividends on Stock Prices
- The Irrelevance of Dividend Policy in Perfect Markets (MM Theorem)
- The Role of Market Imperfections (Taxes, Information Asymmetry)
- The Signaling Function of Dividends and Share Repurchases
- Behavioral Finance Theories on Dividend Preference
Chapter Summaries
- The Dividend Puzzle: The paper introduces the concept of the dividend puzzle, highlighting the ongoing debate surrounding the impact of dividends on stock prices. It emphasizes the importance of understanding dividend policy as a key long-term decision for companies.
- Modigliani and Miller (MM, 1961): This section presents the fundamental model of Modigliani and Miller, which under certain assumptions of a perfect market, suggests that dividend policy is irrelevant to investor wealth. The limitations of this model in real-world scenarios are also discussed.
- Avoiding Dividends Theoretically: The paper explores situations where dividends should be avoided theoretically, such as when there is not enough cash available or when it would necessitate giving up positive NPV projects or issuing new stock.
- Alternatives to Dividend Payments: This chapter delves into alternative uses of excess cash by companies, including reinvesting in positive NPV projects, acquisitions, purchasing financial assets, and share repurchases. Each option is analyzed in terms of its advantages and disadvantages.
- The Impact of Taxes: This section examines the role of taxes in dividend policy, exploring the different tax implications for individual investors, corporate investors, and institutional funds. The tax advantage of share repurchases over dividends is highlighted.
- The Signalling Function of Dividends: This chapter examines how dividends can act as signals to investors, conveying information about the company's future prospects. Different models and theories, such as those of Bhattacharya, Heinkel, Miller and Rock, and Brennan and Thakor, are explored in detail.
- Behavioral Finance Approach: This section discusses the behavioral finance approach to understanding dividend preference, incorporating theories of self-control and choice under uncertainty. It explores how these theories can explain individuals' preference for high dividend payments.
- Desire for Steady Current Income: This chapter considers the argument that investors might prefer dividend payments due to their desire for steady current income, even with the associated tax disadvantages. The role of transaction costs, especially for smaller investors, is analyzed.
- Pros and Cons of Paying Dividends: This section provides a concise summary of the pros and cons of paying dividends, drawing on insights from Ross, Westerfield, and Jaffe (2005).
Keywords
The main keywords and focus topics of this text are: dividend puzzle, dividend policy, stock prices, Modigliani and Miller, market imperfections, taxes, information asymmetry, signaling function, share repurchase, behavioral finance, current income, and investor preference.
- Citation du texte
- DI (FH) Mag. Reinhard Windisch (Auteur), 2005, The dividend puzzle, Munich, GRIN Verlag, https://www.grin.com/document/86704
