“Dividend” of theories built to explain the dividend

 

“Dividend” is the
distribution of profits to the investors’ of the firm. The firm’s dividend
policy depends on its future prospects and the investors’ trade-off analysis
between the current benefits and the growth of the company. The most important
decision for any firm’s financial policy is the dividend distribution as it is
concerned with distributing the profit, among its shareholders. The dividend
policy maintained by any firm has an influence on all the stakeholders of the
firm. Dividend decision is a difficult choice because the management must make
a trade off in allocating their profit to reinvest within the company or
distribute to shareholders. Investors concern about firm’s payout as they get a
yield on their investment or opportunity to earn a capital gain. Shareholders
look dividend sensibly as they feel that there will be fewer amounts available
for redemption their claims if there is a tendency to pay more dividends.
(Sharma and Wadha, 2017).

Though it is remained
unsolved, the “Dividend Puzzle” has been well researched from 1950’s to date.
In this sub section, researcher presents the theoretical literature on “Dividend
Policy”, explaining number of theories built to explain the dividend decision.

Best services for writing your paper according to Trustpilot

Premium Partner
From $18.00 per page
4,8 / 5
4,80
Writers Experience
4,80
Delivery
4,90
Support
4,70
Price
Recommended Service
From $13.90 per page
4,6 / 5
4,70
Writers Experience
4,70
Delivery
4,60
Support
4,60
Price
From $20.00 per page
4,5 / 5
4,80
Writers Experience
4,50
Delivery
4,40
Support
4,10
Price
* All Partners were chosen among 50+ writing services by our Customer Satisfaction Team

 

The Lintner’s explanation on dividend
policy (1956)

 

Lintner (1956) focused
on some important research questions which are still valid in the modern
finance. He studied whether the dividend policy to be changed or maintained as
previous year dividends, whether to satisfy younger or older investors, would
the investors prefer constant dividends or those which fluctuate with the net
earnings.

Lintner’s model
provides a good intuitive explanation of dividend payments. The essence of
Lintner’s dividend model is that, if a firm maintained its target payout ratio,
then the dividend payment in the following year (Div1) would equal a constant
proportion of earnings per share (EPS1). This model is the
result of an investigation conducted on 28 American companies judiciously
selected by Lintner in 1956.

 

But Lintner’s model has,never
been derived formally. There has been no underlying theory. Thus it has been
di?cult to interpret coe?cient estimates and empirical results. It has been
di?cult to know under what conditions or for what type of ?rms the Lintner
model applies, or what forms of payout the model should explain.