Dividend Policy and the Value of the Enterprise

Abstract

“The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials who must set the policy, but to investors planning portfolios and to economists seeking to understand and appraise the functioning of capital markets. Do companies with generous distribution policies consistently sell at a premium over those with small payments ? Is the reverse ever true ? If so, under what conditions ? Is there an optimum payment ratio or range of ratios that maximises the current worth of the shares ?”. Although these questions of fact have been the subject of many empirical studies in recent years, no concensus has yet been achieved. Not only does the empirical evidence seem to conflict, but the underlying theory of share price determination cannot be agreed upon. This chapter surveys current theories concerning dividend policy, and seeks to reconcile them under a common set of assumptions. Then the relevant empirical evidence is presented and criticised, and finally a piece of research carried out by the author is discussed.