Literature Review
exploring the influencing factors of Company dividend policy.
Name: Yi Ji Tao
Student Number: 16340077
Lecture: Thomas Lee
Campus: Bentley
Words: 2046
Abstract
The purpose of this literature review which summarize the views from different articles,
trying to figure out the influencing factors of company dividend policy. Based on this
purpose, we use some empirical studies and examples and try to analyse company divided
policy through multiple perspectives. We also use “corporate governance’ as a starting point
to research and analyse the dividend policy. The results show that corporate governance is a
basic factor, because of this factor, the rights of shareholders can be protected. And the
corporate governance can make the dividend policy more efficient and effective. According
to the research, these factors of company dividend policy include the Tax, Dividends
Signalling, the information asymmetry, profitability. In addition, in the 1958 the Miler and
Modigliani’s (1958) theory discuss and provide in the perfect market, the dividend policy in
not important, and these factors cannot effect the company dividend policy. but in this paper,
based on the imperfect market which is our current financial market, the Miler and
Modigliani’s theory cannot stand in current financial market, and we also use some articles to
support the corporate governance can plays an important role in financial market.
Introduction.
In large companies, institutions ownership and individual ownership and board usually
control the business of company. Based on the separation of ownership and management, the
board of directors can employ professional managers to run the company, at the same time, in
order to protect the shareholders and limit the power of managers and owner, the corporate
governance become very important. And in larger companies, the dividend policy is one of
the part that corporate governance can have impact on. As we know the dividend policy is the
company decide to pay the portion of profits to shareholders. And in the company dividend
policy, the key issue is, which payout methods that the company deicide to select and how the
manager use corporate governance to balance the profits between company and shareholders.
Under normal circumstances, the board of directors can suggest the dividend level, the
shareholders have the rights to make the decision about whether a dividend level should be
executed.
When the profit of company has increase, the dividend should be increased. And under the
normal circumstances, the company will not reduce dividend largely. Baker (1985) theory
think, if the managers think the company’s situation may into a bullish state and they feel
confident in the future, they will increase the dividend level, otherwise they will maintain the
dividend level. Form the shareholders’ perspectives, the company raise dividend level can
make more benefit for the shareholders and the shareholders also can predict that the
company current situation is good and the company managers feel confident to the future
business.
But the Miler and Modigliani’s theory assume some conditions to prove the dividend
irrelevance, which means, they think the company’s share price do not have direct
connections to the dividend policy. These conditions including, 1. Transaction cost do not
exist. 2. The company do not pay the taxes. 3. Investors can get all the information about the
market for free. 4. The borrowing or lending rate remain constant and same. 5. For the
investors, the dividends and capital gains is no difference. Miller and Modigliani’s theory also
points out that if the company’s NPV reach a high level and positive, the dividend will be
their all benefits. Because in the perfect market, the investors will take the profit to buy more
shares and get the all the relevant information that they want to know.
