Dividend Policy

When we revise dividend policy in management accounting, it may be feasible that many things, you can consider and many questions may come up in your mind. Some of these questions answer, already available, so read first about dividend, types of dividend and cost of equity share capital. Now, we study different things in dividend policy through the help of content sites.

Q: - What is Dividend Policy?

Investopedia says, "The policy a company uses to decide how much it will pay out to shareholders in dividends."

Q: - What are the main determinants of dividend policy theories?

Articlesbase says," Dividend policy has 4 theories.

First theory is Residual Theory of dividend policy

The essence of the residual theory of dividend policy is that the firm will only pay dividends from residual earnings, that is, from earnings left over after all suitable (positive NPV) investment opportunities have been financed.

Second theory is Dividend Irrelevancy Theory

Dividend irrelevancy theory asserts that a firm’s dividend policy has no effect on its market value or its cost of capital. The theory of dividend irrelevancy was perhaps most elegantly argued by its chief proponents, Modigliani and Miller (usually referred to as M&M) in their seminar paper in 1961.

Third theory is the Bird-In-The-Hand Theory

Under this theory, Shareholders consider dividend payments to be more certain that future capital gains – thus a “bird in the hand is worth more than two in the bush.

Fourth theory is Dividend Signaling Theory

In practice, change in a firm’s dividend policy can be observed to have an effect on its share price – an increase in dividend producing an increasing in share price and a reduction in dividends producing a decrease in share price.