Chapter 12 - Unconventional Explanations

Abstract

Dividend policy is inconsistent with wealth maximization of the shareholder and is better explained by the addition of sociopsychological elements of behavior explicitly included in a paradigm that is set out to explain this phenomenon. Dividend payouts can be viewed as the socioeconomic repercussion of corporate evolution that causes dividends to be paid to increase the attractiveness of equity issues. The active determination of dividend policy implies that the levels of retained earnings and savings are dividend decision by-products. Corporate management believes that shareholders should receive an equitable portion of earnings. Dividends are smoothed in the short run to conceal the variability of earnings. A change in dividend policy implies a change in managerial expectations of future cash flows and depends substantially on current and past earnings. Dividends are paid because shareholders expect continued dividend growth and because managers believe investors want to receive dividends. Managers believe that dividend payments are necessary to maintain or increase share price and to attract new investors.