What are the theories of dividend policy

The theory of corporate dividend is one of the important theories in corporate finance, mainly dividend irrelevance theory and dividend related theory. The following is my carefully organized dividend policy theory of the relevant information, I hope it will help you!

Dividend Policy Theory

Dividend Theory and Dividend Policy Research

Abstract The theory of corporate dividend is one of the important theories in corporate finance, mainly dividend irrelevance theory and dividend related theory. Under the influence of investor's preference, tax difference of dividend, information transmission, agency cost and transaction cost, how to formulate dividend policy will directly affect the market value of the company. In practice, the company combined with its own actual situation, has formed a variety of dividend distribution policy.

Keywords: dividend theory; dividend policy

Dividend theory is still a controversial issue in the academic world. Fisher? Clare in 1976 called it the ? The Dividend Puzzle? The key to the puzzle is whether the dividend payment rate is related to the shareholders' wealth and the price of the stock. Based on this, there are two major schools of thought in dividend theory: dividend irrelevance theory and dividend correlation theory.

I. Dividend Theory and New Developments

(1) Dividend Irrelevance Theory (MM Theory)

1. The Assumptions of MM Theory

(1) The Assumption of Perfect Capital Markets: Anyone who is a trader does not have enough power to pass through the capital market. trader does not have enough power to significantly affect the current price of a stock through his or her trading activities. At the same time, the trading activities such as issuance and trading of certificates do not have any significant impact on the current price of stocks. There are no brokerage fees, transaction taxes, or other transaction costs associated with the issuance and purchase and sale of certificates, and there are no tax differences between the distribution of profits and non-distribution of profits, or between capital gains and dividends.

(2) The complete rational investor hypothesis: all market participants pursue the goal of maximizing personal wealth.

(3) The assumption of full certainty about the future: all investors have the same beliefs about future investments, profits and dividends.

(4) The assumption of complete information: all investors have equal and free access to any information that affects stock prices.

2. Content of MM theory

(1) The dividend payment rate does not affect the value of the company: the market price of a company's stock is a response to the value of the company, which depends on the assets it owns and its profitability. The distribution of the company's surplus between dividends and retained earnings does not affect the value of the company.

(2) Dividend policy is secondary to the company's policy, while investment policy is the company's leading policy. This is because the investment policy is the basis for the formation of the profitability of assets, and dividend policy is just a financing strategy subordinate to the investment policy.

(3) vested dividends and capital gains from share price appreciation are the two main components of shareholder wealth. The company pays dividends will make the company's growth is reduced, which in turn causes the share price to fall. The benefit to shareholders from the dividend will be more than offset by the loss from the fall in share price. Therefore, the payment of dividends will not affect the amount of shareholder wealth.

(4) For rational investors, there is no net preference between dividends and capital gains. If the dividend payout is too low, investors can sell some of their shares to compensate for the shortfall in the dividend payout. On the other hand, if the dividend payment is too high, investors can buy some stocks to expand their investment.

(B) Dividend theory

1. Traditional dividend theory

Traditional dividend theory is also known as the "bird in hand" theory. The Bird-in-Hand Theory? or? Bird in hand? theory, it is believed that investors have a dividend preference, and therefore advocate a higher dividend payout ratio. That is, investors are risk averse, and when choosing between dividends and future capital gains, they prefer the former. Because dividends are received in the current period on the basis of continuing operations, while the realization of capital gains is in the uncertain future, investing in dividend-paying companies investors can to a certain extent eliminate uncertainty, also known as? A bird in the hand, better than two birds in the forest? Therefore, investors are willing to pay a higher price for stocks that pay higher dividends and are otherwise identical.

Therefore, the company pays dividends at the right time, which is conducive to eliminating shareholders' uncertainty about the return on investment. Based on this view, it can be concluded that the dividend policy will have a practical impact on the stock price.

2. Differential Tax Theory

Differential Tax Theory is the first theory that relaxes the strict assumptions of MM theory, which introduces taxes and relaxes the assumption that there is no tax. Under the current law, a company is subject to corporate income tax regardless of whether it pays dividends or not, while shareholders are subject to personal income tax when dividends are paid. Generally, capital gains are taxed at a lower rate than dividend income, and it is possible to defer the realization of capital gains by continuing to hold the stock, thereby postponing the timing of the tax payment and enjoying the benefit of tax deferral. Therefore, all other things being equal, investors will prefer capital gains to cash dividends. Therefore, the theory of differential tax liabilities suggests that shareholders prefer capital gains to dividends, and thus are happy to choose a low dividend payout rate.

So investors can compare dividend income and capital gains, which has more tax advantages, and choose the appropriate dividend policy to maximize their after-tax returns.

3. Signaling theory

Signaling theory relaxes the assumption of MM theory that investors and management have the same information, and believes that there exists information asymmetry between management and external investors due to agency relationship. Management has more information about the future cash flows, investment opportunities and earnings prospects of the enterprise, and outside investors can eliminate the information asymmetry by observing the dividend signals sent by management.

The theory suggests that dividends are a means for management with internal information to communicate its information to the outside world, i.e., a change in dividends conveys important information to investors, i.e., a change in management's expectations of future surplus. Generally speaking, after the announcement of the increase in dividends, the stock price will rise; and announced a decrease in dividends, the stock price will fall, that is, the dividend increase (decrease) is expected to change the future surplus good (bad) sign.

4. Agency cost theory

Agency cost theory is developed on the basis of relaxing the assumption that the interests of management and shareholders are identical in MM theory. In modern companies, the most important principal-agent relationship related to dividend policy is the principal-agent relationship between shareholders and managers. Due to the decentralization of the company's property rights, there are often conflicts of interest between shareholders and managers. Operators sometimes sacrifice the interests of shareholders to maximize their own benefits.

According to the theory of agency cost, dividend payment can effectively reduce the agency cost. First of all, the payment of dividends reduces the management's control over the free cash flow, so that it loses the source of funds that can be used to pursue its own interests, and promotes the optimal allocation of funds; secondly, the payment of large dividends makes the company's internal capital from the possibility of retained earnings supply the smaller, in order to meet the capital needs of new investments, it is necessary to seek external liabilities or equity financing, however, access to the capital market for financing However, access to the capital markets for financing means that the company will be subject to more and stricter supervision and scrutiny. The suppliers of new capital actually help shareholders to monitor managers, and dividend payments become an indirect regulatory mechanism to discipline managers and increase firm value by reducing potential agency costs for managers.

5. Transaction Cost Theory

Shareholders can create their own dividends or reinvest the dividends they receive, but brokerage commissions are incurred in the transaction, and a company that pays cash dividends by issuing stock will incur direct transaction costs in the form of issuance costs.

Both brokerage and issuance costs vary with the size of the transaction. Economies of scale make it cheaper for a company to issue shares in large quantities than for individual shareholders to sell shares in small quantities. As a result, it is usually cheaper for a corporation to pay dividends than for shareholders to create their own dividends. Regular dividend checks relieve shareholders of the inconvenience and large brokerage commissions associated with making small transactions.

(C) New Development of Dividend Theory

1. Follower Effect Theory

Follower Effect Theory (FET), which relaxes the assumptions of MM theory - no taxes, no transaction costs, etc., to study the dividend policy in an imperfect market.

The follower effect, also known as the customer effect, is a further development of the narrow theory of tax differences. The theory of follower effect starts from the marginal income tax rate of shareholders, and considers that each investor is in a different tax bracket. For example, rich investors have high marginal tax rates and pension funds have low marginal rates, which will cause their attitudes towards dividends to be different; investors with high marginal tax rates prefer stocks with low or no dividend payment rates; investors with low marginal tax rates prefer stocks with high dividend payment rates. Accordingly, the company will adjust its dividend policy accordingly, so that the dividend policy meets the wishes of shareholders. When equilibrium is reached, stocks with high dividend payout ratios will attract one group of followers (low marginal tax bracket investors), and stocks with low dividend payout ratios will attract another group of followers (high marginal tax bracket investors). This phenomenon of investors flocking to firms with dividend policies that satisfy their preferences is called the follower effect. follower effect?

2. Catering theory

Catering theory is a behavioral science introduced by scholars and applied to the study of dividend theory, with the help of behavioral finance research results to abandon the assumption that investors are rational and the market is efficient. That is, there are rational arbitrageurs as well as irrational investors, and these investors do not focus on the absolute level of the ultimate wealth, but rather on their gains and losses relative to a certain reference standard. Markets are inefficient, and the reality of arbitrage is not only risky but also limited.

According to the pandering theory, corporate managers usually formulate dividend policies that cater to investor preferences, and the ultimate goal of pandering is to obtain a stock premium. That is, when investors tend to be risk-averse, they may prefer dividend-paying stocks because they may think that such companies are less risky, so they pay a premium for dividend-paying stocks, and managers pay dividends.

Second, the dividend policy

By the dividend-related theory, the company's core financial issues in the dividend policy occupies an important position, when the company through its own business activities to obtain cash flow, will be faced with such decisions, should be re-invested in the production of operating activities, or will it be distributed to investors? At what rate? It is related to the future development of the company on the one hand, and the welfare of the company's shareholders on the other. A good or bad dividend policy will affect the realization of the value of the company.

A company's dividend is a kind of return to shareholders, and different dividend policies will have an impact on the share price. The company should choose the dividend policy according to its own situation. The basic types of dividend policy are: residual dividend policy, fixed dividend or stable growth dividend policy, variable dividend policy, low normal dividend plus additional dividend policy.

(a) Residual dividend policy

Residual dividend policy is that when the company has a good investment environment, according to the target capital structure in advance, the equity capital required for investment, first from the company's surplus retained, after meeting the investment needs of the capital, if there is a surplus, the company will be the remaining portion of the dividend paid to shareholders. The essence of this policy is to adopt the viewpoint of dividend irrelevance.

Under this dividend policy, the amount of dividends paid out by the company will vary from year to year according to the investment opportunities and the level of surplus. With a constant level of surplus, dividends will vary in the opposite direction of the number of investment opportunities: the more investment opportunities there are, the lower the dividend payout; conversely, the fewer investment opportunities there are, the higher the dividend payout.

The advantage is that retained earnings are preferentially reinvested, which helps to reduce the cost of capital for reinvestment and maximize the long-term benefits.

(2) Fixed dividend or stable growth dividend policy

This policy is to predetermine the amount of annual dividends per share and keep it unchanged. The company pays a fixed amount of dividends over a long period of time, and only when the company's future earnings are stable and new higher dividends can be sustained, can the company consider increasing the fixed annual dividend per share, which then becomes a stable growth dividend policy.

Advantages are that the dividend policy conveys to the market the information that the company's future business prospects will be better, which is conducive to the company to establish a good image and enhance the confidence of investors in the company's investment, so that the price of the company's shares can remain relatively stable; the dividend policy caters to the shareholders who need and rely on fixed dividend income as a source of consumption; the dividend policy to avoid large, disorderly fluctuations in the payment of dividends, which is the main reason for the increase in the amount of dividends per share. This dividend policy avoids large and disorderly fluctuations in dividend payments, helps to forecast cash outflows, and facilitates financial management and administration. The disadvantage is that the dividend policy dividend payment is disconnected from the surplus, when the company's surplus is low, stable and unchanging dividends may become a financial burden on the company, resulting in a shortage of funds, the financial situation of the company deteriorated, thus affecting the development of the company.

(C) Variable dividend policy

When determining the dividend distribution plan, first of all, a dividend payout ratio of dividends as a percentage of earnings should be determined, and the dividend amount in the coming years fluctuates according to the company's business performance, with a high dividend amount in the year when the surplus is high, and a low dividend amount in the year when the surplus is low.

The advantage is that the implementation of a relatively fixed dividend payment rate can make the dividend and the company's surplus closely linked to the expression of? The principle of "more profits, more shares, less profits, less shares, no profits, no shares". The principle. The disadvantage of this policy is that the volatility of the dividend in each year is large, which may directly affect the shareholders' expectations of the company's dividends, and easily create a feeling of instability for shareholders, which is not conducive to stabilizing the stock price.

(D) low normal dividend plus extra dividend policy

With this policy, the company must first of all fix the annual dividend payment at a lower level, and this lower level of dividend is called normal dividend. Then, the company pays additional dividends to the shareholders only in the years when the company is doing better and has more surplus as per the actual situation.

The advantage is that the company has sufficient flexibility in paying dividends. When the company's poor profits or the need for more funds for additional investment, you can maintain the set lower but normal dividends, which can reduce the company's financial burden, on the other hand, will not produce shareholders on the dividend of the feeling of decline; and when the company's surplus has a substantial increase, it can be a moderate increase in the payment of additional dividends to shareholders of the excess part of the benefits to increase their confidence in the company to keep the company's stock market price at a higher level. The market price of the company's stock will be maintained at a higher level. The shareholders who rely on dividends can at least receive a low but stable dividend income every year, thus attracting the number of these shareholders and preventing the company's stock price from dropping significantly. The disadvantage is that the company still has to pay normal dividends when there is little or no profit. Although the amount of normal dividends paid may not be large, but after all, the payment of dividends will increase the company's capital outflow, for the company is already very tight funds, is undoubtedly worse.

If the company's operating status is good, more profitable, and continue to pay additional dividends, it is easy to raise shareholders' expectations of the dividend, so that the additional dividend is considered as a "normal" dividend. Normal? This will lead to a great deal of dissatisfaction among the shareholders when the company's profitability declines and the extra dividends are reduced.

In the practice of dividend distribution, dividend theory is one of the important bases of dividend policy, and the dividend policy chosen by the company is closely related to the dividend theory that the company believes in.

Dividend policy is not just a dividend decision, it should be integrated into the company's overall strategic decision-making, so the choice of dividend policy should be focused on the long-term development of the company, planning from the perspective of the overall situation, weighing the interests of all stakeholder groups, taking into account the current situation of the company itself and determine the best dividend policy.

A Review of the Literature on Dividend Policy

Abstract: By the end of 2007, China's A-share listed companies reached thousands, and the securities market has become an important part of China's economy. However, it should also be seen that China's listed companies generally do not distribute dividends or distribution of dividends for the purpose of refinancing the phenomenon, which is known as the academic community? This has been called the mystery of China's dividend policy by academics.

Keywords: cash dividend stock dividend dividend policy Editor.

Should a company's after-tax profits be distributed to shareholders or remain within the company? What approach should be taken to distribute dividends to shareholders? How much dividends should be distributed to shareholders? How does the amount and method of dividend distribution affect the value of the company and the wealth of its shareholders? These questions have not been answered unanimously, so the issue of corporate dividend policy has become a hot and difficult point of research in the field of corporate finance for a long time.

First, foreign research

The study of dividend policy of listed companies in western countries has a long history, and it was first linked with the analysis of securities valuation, and has not yet formed a specialized research field. The real research on dividend policy began in the 1960s, when Miller and Modigliani, two financial scientists from the University of Chicago, published an article entitled "Dividend Policy, Growth and Stock Valuation" in 1961, and dividend policy became a hot research topic for many scholars. Since then, many financial scientists have published a large number of papers on this, and formed the traditional dividend policy theory and modern dividend policy theory. The former mainly focuses on the correlation between dividend policy and stock prices, forming the theory of dividend irrelevance and tax differential theory; while the latter focuses on the reasons for the changes in stock prices caused by dividends, forming the theory of the follower effect, the theory of dividend signaling, and the theory of agency costs.

(a) The traditional theory of dividend policy

The traditional theory of dividend policy that investors prefer cash dividends, and do not like to retain profits to the company. This is because: for investors, cash dividends are ? a bird in the hand? that are tangible, while retained profits are ? Hiding in the forest of the bird? which can fly away at any time. Since the present retained earnings do not necessarily translate into future dividends, then in the eyes of investors, the more dividends distributed by the company, the greater the market value of the company. 1956 Harvard University John Linnaeus (John Linnaeus), the company's market value. Linna (John.1inther) for the first time proposed a theoretical model of the company's dividend distribution behavior, opened the prelude to the study of dividend policy.

1.? A bird in the hand? Theory. ～The main representative of the theory is Gordon. The main representative of the theory is Gordon. 1962 Gordon (Grordon.M.J) and Sharp (EliShapiro) derived the Gordon model on the basis of numerous studies. The theory is based on investors' preference for immediate income and immediate dividends can eliminate the uncertainty of the characteristics of the stock price changes, that in the eyes of investors, dividend income is more reliable than the retained earnings reinvested in capital gains, due to the general risk aversion of investors, would rather receive less dividends now, rather than take greater risks and wait until the future to receive more dividends, so investors generally prefer cash dividends rather than capital gains. In this way, the theory suggests that dividend policy is closely related to shareholder wealth, and that an increase in dividend payments will increase shareholder wealth.

2. Dividend Irrelevance Theory. The most famous MM dividend irrelevance theory is put forward by Modigliani (Modigliani) and Miller (Miller) in 1961, because the first letter of both surnames are M and abbreviated as MM theory. Modigliani and Miller believe that in a perfect capital market with symmetric information, under the conditions of the company's investment decisions are established, the company's value and the company's financial decisions are the same. value and the company's financial decisions are irrelevant, therefore, whether to distribute cash dividends has no effect on the wealth of shareholders and the value of the company, dividend policy is not related to the stock price, the company's dividend policy does not affect the market price of the stock.

3. Tax effect theory. Farrar (Farrar) and Sel?wyn (Sel?wyn, L) through research that in the absence of tax factors, the company chooses what kind of dividend payment is not very important. However, if cash dividends and capital gains can be taxed differently, e.g., the tax on cash dividends is higher than the tax on capital gains, paying cash dividends is no longer the optimal dividend distribution policy in the view of the company and investors. It can be seen that the existence of tax differences in the premise of the company to choose a different way of dividend payment, not only on the market value of the company will have a different impact, but also will make the company (and individual investors) the difference in the tax burden, even if the tax rate is the same, the capital gains only in the realization of the time to pay the capital gains tax, as opposed to cash dividends tax, still has the benefit of delaying the payment of taxes.

(2) Modern dividend policy

Modern dividend policy holds that in a perfect capital market environment, dividend policy is not important, and each shareholder can choose the company's dividend policy at no cost to suit his or her own preferences, so dividends do not affect the value of the company. However, in the real economy, due to the three defects of asymmetric tax burden, asymmetric information and transaction costs in the capital market, the company's dividend policy will have an impact on the value of the company, which makes the dividend policy very important.

1. Follower effect theory. The follower effect theory is a further development of the tax gap theory. The theory suggests that shareholders have different tax brackets, leading to different attitudes towards dividend levels. Some have high tax brackets while others have low tax brackets. The company should adjust its dividend policy accordingly to equilibrate it with the shareholders' wishes. Stocks with high dividend payouts will attract a class of followers held by investors in low marginal tax brackets; stocks with low dividend payouts will attract another class of followers held by investors in high marginal tax brackets.

2. Signaling theory. The idea that dividends have informational connotations germinated in Lintner and was first proposed by MM.Bhattacharya (1979) developed the first signaling model of dividends. Starting from the relaxation theory's assumption that investors and management have the same information, this school of thought argues that there is an information asymmetry between the authorities and the firm's external investors, and that management possesses more inside information regarding the firm's prospects.　　3. agency cost theory. the agency cost doctrine of Jensen and Meckling (1976) lays the theoretical framework for the study of firm-wide principal? Jensen and Meckling (1976) laid the theoretical framework and analytical foundation for the study of agency problems.Jensen and Meckling defined an agency relationship as a contract under which one or more persons (principals) engage another person (i.e., an agent) to perform certain services on their behalf, which includes entrusting the agent with several decision-making powers. Due to the information asymmetry generates moral hazard and adverse selection problems, from which they locate the agency costs as the monitoring expenditures incurred by the principal, the binding expenditures incurred by the agent and the residual losses borne by the principal.

4. Dividend information asymmetry theory, transaction cost theory, growth opportunity theory. Information asymmetry refers to the temporal and quantitative inconsistency between managers and investors in terms of information about the company. Dividend information asymmetry theory suggests that managers of a company have more inside information than outside investors and much earlier in time than outside investors. Transaction cost theory suggests that although shareholders can create captive dividends or reinvest the dividends they receive, transaction costs (e.g. brokerage commissions, etc.) are incurred in the transaction. The growth opportunity theory refers to the fact that when a firm enters a period of achievement, it usually starts paying dividends from a certain point onwards and gradually increases the percentage of net profit paid as dividends. Empirical evidence suggests that the pattern of a firm's dividend policy generally remains constant, and that when the dividend policy changes, the average stock price changes significantly. Therefore, companies generally maintain a stable dividend policy.

Second, domestic research

China's dividend policy research started late, in the early 1990s, China established a capital market, and gradually began dividend exploration in the mid to late 1990s. Translation draws on the West's mature and complete dividend theory and empirical evidence, research methods combined with the actual situation of China's capital market dividend research is a major feature of China's research in this area. At present, theoretical and empirical research on equity structure and dividend policy research focuses on different. Equity structure mainly explores the impact of equity structure on the company's operating performance and has a number of empirical results. The research on dividend policy focuses on the comprehensive analysis of many factors of dividend distribution policy, and seldom analyzes from the aspect of equity structure. There is a strong correlation between the two, and both are less concerned with the relationship between equity structure and dividend policy. In fact, the study of business performance is the result of a process, which belongs to the category of ex post facto control, while the dividend policy has a double significance, on the one hand, the choice of allocation methods that are not conducive to the development of the company will have a direct impact on the company's performance; on the other hand, the company's performance will in turn become a constraint on the issuance of dividends, both ex post facto and ex post facto control, which helps investors to detect problems in time and take measures to protect their own interests. In 1999, Lv Changjiang and Wang Kemin used factor analysis to construct 8 statistically significant factors related to cash dividends on the basis of principal component analysis of 38 variables that may affect the dividend distribution of listed companies, and further used step-by-step regression analysis to study the relationship between the factors and the level of dividend payout, showing that the larger the proportion of state-owned and legal person shares held, the stronger the degree of insider control, and the higher the level of dividend payout, and the higher the level of insider control of the company. The greater the proportion of state-owned and corporate shares, the stronger the degree of insider control, the lower the level of dividend payment; the lower the proportion of state-owned and corporate shares, the more the company tends to retain the profits in the future development, easy to use stock dividends instead of cash dividend payment policy.

In 2001, Zhao Chunguang, Zhang Wenli, and Ye Long selected 210 companies listed before the end of 1999 as a sample to study the drivers of dividend policy choice, and the results also showed that the higher the concentration of equity may be less likely to distribute stock dividends. In 2001, Yuan Hongqi conducted a cross-sectional analysis of the dividend distribution plans of companies other than financial concept stocks on the Shanghai and Shenzhen stock exchanges from 1994 to 1997, and the conclusion showed that the controlling shareholders of listed companies had the behavior of transferring cash from listed companies through cash dividends, and there was a wastage of funds retained within the company with stock dividends. Wei Gang 2001 to 389 companies 1367 sample observations as the basis, using Legit multiple regression model to analyze the relationship between dividend distribution and equity structure of listed companies, found that the higher the proportion of state shares and the proportion of corporate shares, the higher the probability of dividend distribution of listed companies; on the contrary, the lower the proportion of state shares and the proportion of legal person shares, the lower the probability of dividend distribution of listed companies.

III. Summary

From the current relevant literature, whether it is the traditional dividend theory or modern dividend theory, whether it is from the point of view of the tax differential theory, signaling effect, or from the point of view of the agency cost theory, Chinese and foreign scholars have not been able to reach a unanimous agreement, and the Chinese and foreign scholars have not been able to reach a unanimous agreement on this issue. The mystery of dividend is still an uncharted territory. is still an uncharted territory. Modern corporate finance is developed on the basis of relaxing the assumptions of MM theorem and based on realistic conditions. As can be seen from the development lineage of the theory, it has been increasingly involved in the impact of the divergence of interests among stakeholders and among shareholders on dividend policy. In foreign countries, the research on dividend policy usually takes MM theory as the research thread to study the real-world dividend problem by relaxing its strict assumption conditions. After entering the 1970s, financial scholars applied the research results of asymmetric information theory to financial theory, these theories give a new explanation to the financial decision-making of the real-world company, breaking through the traditional focus on the study of external visible factors and ignoring the study of personal motivation that has the right to decide on the distributable earnings, people began to realize that asymmetric information determines the imperfection of the contract which will lead to the personal motivation of the main body in the financial decisions as a result of the decision-making process. The personal motivation of the main body of the financial decision-making plays a role that cannot be underestimated, and at the same time, the internal governance structure of the company and the external governance environment related to the motivation have also become the focus of the research. Domestic research is mainly reflected in the application of foreign dividend theory to explain the special situation in China, and seldom systematically study the dividend payment motivation of the main interests of listed companies in China from the perspective of the internal governance mechanism and external governance environment. Therefore. In China, it will be a new highlight to study the dividend policy of listed companies in China from the governance mechanism of the company.