Reappearing Dividends

In: Business and Management

Submitted By Vishavjeet
Words 10222
Pages 41
V O L U M E 1 6 | N U M B E R 4 | FALL 2004

Journal of


In This Issue: Disclosure
Beyond Financial Reporting—An Integrated Approach to
Corporate Disclosure

Amy Hutton, Dartmouth College

Making Financial Goals and Reporting Policies Serve Corporate Strategy:
The Case of Progressive Insurance

An Interview with Tom King, Progressive Insurance

Identifying and Attracting the “Right” Investors: Evidence on the Behavior of Institutional Investors

Brian Bushee, University of Pennsylvania

Roundtable on Corporate Disclosure

Panelists: John Graham, Duke University; Trevor Harris,
Morgan Stanley; Amy Hutton, Dartmouth College; Charles
Kantor, Neuberger Berman; Tom King, Progressive
Insurance; Rick Passov, Pfizer; Erik Sirri, Babson College; and Joe Willett, (formerly) Merrill Lynch.
Moderated by Don Chew.

Where M&A Pays and Where It Strays: A Survey of the Research

Robert Bruner, University of Virginia

Pathways to Success in M&A

Mahmoud Mamdani and David Noah, Morgan Stanley

In Defense of Incentive Compensation: Its Effect on Corporate
Acquisition Policy

Sudip Datta and Mai Iskandar-Datta, Wayne State

Reappearing Dividends

Brandon Julio and David Ikenberry, University of Illinois

Making Capitalism Work for Everyone

Raghuram Rajan and Luigi Zingales, University of Chicago

University, and Kartik Raman, Bentley College

Reappearing Dividends by Brandon Julio and David L. Ikenberry, University of Illinois at Urbana-Champaign *


n his 1976 classic called “The Dividend Puzzle,”
Fischer Black wrote that there was no convincing explanation for public corporations’ centuriesold practice of paying cash dividends to their shareholders. His argument rested on two main premises.
The first was Modigliani and Miller’s demonstration that,…...

Similar Documents


...FY13E FY14E FY15E NII 7,669 9,663 12,070 15,217 17,850 Adj BV (Rs) 224.7 251.5 287.4 337.3 402.3 P/Adj BV (x) 1.7 1.5 1.3 1.1 0.9 ROE (%) 22.2 20.8 21.5 24.0 24.4 ROA (%) 1.7 1.5 1.5 1.5 1.5 Source: Company, Centrum Research Estimates Please refer to important disclosures/disclaimers inside Shareholding pattern (%) Dec-11 Promoter FII DII Others Total Source: BSE 25.77 26.96 15.92 31.35 100.0 Sep-11 25.77 27.23 16.71 30.29 100.0 Jun-11 25.35 26.34 17.64 30.67 100.0 Company background Established in 1916 at, then a small textile town, Karur, has a long history in the Indian banking space. Headquartered in Tamilnadu, KVB is among the very few banks across the Indian banking space that has remained profitable and paid dividends every year throughout its existence. The bank primarily operates in Southern India with about 50% of its 433 branches located in Tamilnadu. The regional dominance and the resulting expertise of local market have ensured a fine balance between strong profitability and balance sheet growth thus making KVB a small but quality franchisee among the regional banks in India. In terms of operational strategy, the bank has positioned itself as a niche, SME-focused, working capital-intensive bank with a significantly high proportion of secured lending towards creation of productive assets. As part of its centenary celebrations, KVB aims to achieve total business of Rs 1250bn by 2016 and has roped in Boston Consulting Group to advice bank on......

Words: 9666 - Pages: 39

Dividend Policy

...Chapter 13 Dividend Policy Solutions to Problems P13-1. LG 1: Dividend Payment Procedures Basic (a) Retained earnings (Dr.) Dividends payable (Cr.) (b) Ex dividend date is Thursday, July 6. (c) Cash $170,000 Dividends payable Retained earnings $0 $2,170,000 Debit $330,000 $330,000 Credit (d) The dividend payment will result in a decrease in total assets equal to the amount of the payment. (e) Notwithstanding general market fluctuations, the stock price would be expected to drop by the amount of the declared dividend on the ex dividend date. P13-2. LG 1: Dividend Payment Intermediate (a) (b) (c) (d) Friday, May 7 Monday, May 10 The price of the stock should drop by the amount of the dividend ($0.80). She would be better off buying the stock at $35 and taking the dividend. Her $0.80 dividend would be taxed as the maximum rate of 15 percent and her $4 short-term capital gain would be taxed at you ordinary marginal tax rate, which is probably higher than the 15 percent. If she bought the stock post dividend for $34.20 she would pay her marginal ordinary tax rate on the full $4.80 of short-term capital gains. P13-3. LG 2: Residual Dividend Policy Intermediate (a) Residual dividend policy means that the firm will consider its investment opportunities first. If after meeting these requirements there are funds left, the firm will pay the residual out in the form of dividends. Thus, if the firm has excellent investment opportunities, the dividend will be smaller than if......

Words: 2559 - Pages: 11

Dividend Policy

...The term ‘dividend policy’ refers to “the practice that management follows in making dividend payout decisions or, in other words, the size and pattern of cash distributions over time to shareholders” (Lease et al., 2000, p.29). This issue of dividend policy is one that has engaged managers since the birth of the modern commercial corporation. Surprisingly then dividend policy remains one of the most contested issues in finance. Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to Payout some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Management must also choose the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash. Our group have selected 3 journals related to the dividend policy in...

Words: 3711 - Pages: 15

Dividend Policy

...THE ROLE OF DIVIDEND POLICY IN STOCK PRICE DETERMINATION IN TELECOMMUNICATION INDUSTRY: THE CASE OF PLDT AND GLOBE FATIMA KAYE A. DE CHAVEZ, LORELLA A. ESPELETA and LESLIE JOY A. PATIO College of Business and Accountancy University of Batangas ABSTRACT The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the best dividend payout ratio the firm can adopt. But, what does "best" mean in this concept? This paper is an attempt to explain the effect of Dividend Policy on the Stock Prices by taking the top two Telecommunications Company namely Philippine Long Distance Telephone Company and Globe Telecom. Other various websites were reviewed to see the significance of these dividend policies on the determination of stock prices. Charts, tables and other significant information of these two telecommunication companies which have been evaluated served as the methodology used by the researchers. The study identified that these top two telecommunication companies have different dividend policies being implemented. This difference among the two companies does not have a significant impact as long as stock price determination is concerned. The study also showed that an increase or a positive change in the company's dividend ratio gives a higher dividend among stockholders, yet several minor reductions to dividends have occurred due to capital......

Words: 2768 - Pages: 12

Dividend Policy

...Dividend Policy at Linear Technology from StudyMode Of the 16 companies on the SOX index, six paid dividends and Linear Technology is one of them started at the second quarter in 1993 which is 5.3 million in total. However, in the case, according to Coghlan, “The quarterly dividend was initially set at $0.05 per share. This amounted to $8.3 million, or 15% of FY 1994 earnings.” And their most recent dividend in 2002(cause in the exhibit2, there’s only threes quarter’s data in 2003, so that’s why I choose 2002 as the last year), the dividend was $0.17 per share amounted to 54 million total. Through out the decade, the company’s dividend generally increased and so did share repurchase except 1997 and 2000 which is 11.6 and 0. Their cash flow almost connected positively with their dividend except year 1999 and 2002. Because during these two years, company spent large amount of money repurchase their stock and left few cash. Linear bought back their stock when they believed the price of the stock was undervalued. One thing for sure for the Linear, they got excess cash. Based on the balance sheet of 2003, positive cash flow could faster the development of the company but they also need to suffer the extra tax. For example, in 2003, the company got 1565.2 million of cash sitting on the balance sheet. And today, Chase provides the one year regular saving rate with 0.01%. Thus, the extra tax would be: 15652000000*0.01%*38.6%=60,416.72. And also, the company failed to involve the......

Words: 604 - Pages: 3

Dividend Police

...Abstract: As Bangladesh is a developing country, the corporate finance is growing very slightly in our country. One of the important aspects of a corporation is its "Dividend Policy" that affects the financial structure, flow of funds, liquidity, price of stocks, and shareholder's satisfaction. This paper attempts to determine how the Beximco Pharmaceuticals Ltd (BPL) uses its dividend policy to increase the value of the firm and the impact of dividend policy on its stock price. We tried to illustrate and analyze net income, earning per share, cash dividend, stock dividend, dividend payout ratio and right share for empirical analysis of dividend distribution of Beximco Pharmaceuticals Ltd (BPL).The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company. 1.2 Introduction: Dividend Policy is concerned with taking a decision regarding paying cash in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investor; however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company. . 1.3 An Overview of Beximco Pharmaceuticals Ltd (BPL): Beximco Pharmaceuticals......

Words: 4214 - Pages: 17

Dividend Policy

...SCHOOL OF MANAGEMENT MASTER IN BUSINESS ADMINISTRATION (MBA) SUBMITTED BY; ROHAN DEEPAK NIKAM ROLL NO. 013096 MBA FINANCE 2 2013-2015 SUBJECT: CORPORATE FINANCE AVAILABILITY OF DIVIDEND POLICY IN CORPORATE SUBMITTED TO: PROF. NEETU SHARMA MBA FINANCE-II MEANING OF DIVIDEND POLICY A dividend refers to that portion of a firm's net earnings which are paid to shareholders. Dividends are paid either in cash or stock. Since dividends are distributed out of the profits, the alternative to the payment of dividends is the retention of earnings. The retained earnings constitute an important source of financing the investment requirements of the firm. There is inverse relationship between retained earnings and cash dividends. More dividends result in smaller retentions where as lesser dividend results in larger retentions. Thus, dividends and retained earnings are competitive and conflicting. Dividend decisions refer to the decisions regarding the division of net earnings to the dividend and retained earnings. A firm can distribute all of its earnings to the shareholders as dividends or can retain all of its earnings for reinvestment as retained earnings or can distribute a part of earnings as dividend and retain the balance for re-investment purpose. Dividend decision is a major financial decision in the sense that a firm has to choose between distributing profits to the shareholders and ploughing back them into the business. The selection would be influenced by the......

Words: 2068 - Pages: 9

Dividend Announcement

...Surabaya ( BES ). Indonesia sebagai pasar yang sedang berkembang (emerging market), memiliki tingkat fluktuasi pergerakan harga ekuitas di pasar modal yang relatif tinggi. Kondisi tersebut dipengaruhi oleh beberapa faktor antara lain informasi luar perusahaan (eksternal), serta informasi internal perusahaan. Ada beberapa informasi laporan keuangan yang dapat diperhatikan seperti informasi tentang cash flow, earnings atau informasi-informasi lain yang berhubungan dengan kebijakan perusahaan , misalnya informasi mengenai pengumuman dividen bagi para pemegang saham dan sebagainya. Dalam berinvestasi investor sebagai penanam modal bertujuan untuk mendapatkan imbalan atau pendapatan dari dana yang diinvestasikan berupa capital gain atau dividend. Capital gain adalah selisih antara nilai jual dengan nilai beli saham bila investor menjual saham tersebut. Sedangkan dividen adalah proporsi laba atau keuntungan yang dibagikan kepada para pemegang saham dalam jumlah yang sebanding dengan jumlah lembar saham yang dimilikinya. Para spekulator umumnya lebih memanfaatkan capital gains karena sesuai dengan perubahan harga saham yang terjadi pada setiap hari perdagangan saham. Perubahan harga saham tersebut dipicu oleh banyak faktor salah satunya adalah informasi mengenai dividen. Informasi tersebut termasuk mengenai apakah perusahaan membagikan dividennya serta besarnya dividen yang dibagikan. Selain itu, banyaknya saham yang diperdagangan di Bursa Efek membuat investor perlu melakukan......

Words: 1103 - Pages: 5

Dividend Policy

...Theories for Dividend Policy and Factors Affecting Dividend Payout A Review of the Literature Prepared for, 11038 Corporate Finance 307 School of Economics and Finance Curtin Business School Curtin University Miri Sarawak Campus Abstract The main objective of this literature review is to highlight the major theories for dividend policy that have been discussed and argued by many researchers over the years. It is aim to helping firms’ management to set their dividend policy and provide additional knowledge to investors. The theoretical aspect is agency theory which has negative relationship between percentages of insiders and ratio of dividend payout. The signaling theory is applicable in the real world but there is no evidence to support changes in dividend payout signaling the current and future performance of the firm. Bird-in-the-hand theory which risk adverse investors prefer receive dividend now instead of sell their shares in future for capital gain and this theory was not agreed by MM. Next is tax preference theory to study whether the level of firm leverage ratio will affect the dividend payout but it is not applicable for Indian firms. Lastly will discuss about how firm size and financial leverage can affect the firms’ dividend payout. In conclusion, since firms are free to choose whether to distribute dividend or retained their earnings, so there are not right or wrong theories and factors for dividend policy. Government regulations on firms and......

Words: 4626 - Pages: 19


...return than the market rate of return. The CAPM model concentrates only on the pricing of systematic risk 1. CAMP assumptions * We have assumed that investors only care about means and variances. This rules out skewed distributions of asset returns (in fact it is more restrictive than this – it amounts to an assumption that asset returns are normally distributed) * We have assumed that there is a risk-free asset (this has been questioned during the recent financial crisis when even sovereign debt has been seen as risky) * We have assumed that shareholders just get a unified return on their shares and don’t care about how this return is broken down between dividends and capital gains. This is equivalent to assuming either that taxation is neutral between dividends and capital gains or that no dividends are paid. * We have worked within a single-period framework where investors simply receive a single return in the next period. That is not such a problem with regard to returns because that single return could be seen as encapsulating all future payments on that asset but it does rule out time-varying discount rates. * We have assumed that competition will force every asset return onto the capital market line. That requires a whole range of other assumptions – perfect capital markets and no restrictions on short-selling (so that investors are not held back from possible arbitrage transactions), no transactions costs, efficient markets which provide full......

Words: 1906 - Pages: 8

Dividend Policy

...2006. Are dividends disappearing? Dividend concentration and consolidation of earnings. Journal of Financial Economics 72 (2014), pp. 425-456 2) Baker, M., J. Wurgler, 2004. A Catering Theory of Dividends. The Journal of Finance, Vol. 59, No. 3 (Jun., 2004), 84-99 3) Corporate dividend policy in practice: Evidence from an emerging market with a tax-free environment Abdelaziz Chazi a,⁎, Narjess Boubakri a, Fernando Zanella, 2011, Pacific-Basin Finance Journal 19 (2011) 245–259 4) Payout policy in the 21st century Alon Brava , John R. Grahama , Campbell R. Harveya,b, and Roni Michaely, 2005. Journal of Banking & Finance, 35-49 5) «Determinants of dividend smoothing in emerging market: The case of Korea», Jinho Jeong, Emerging Markets Review 17 (2013) 76–88 6) «Dividend Policies in Australia and Japan», HORACE HO, IAER, 2009, 91-100 7) The impact of government ownership on dividend policy in China, Xi Wang, David Manry, Scott Wandler, Advances in Accounting, incorporating Advances in International Accounting 27 (2011) 366–372 8) «Dividend policy of German firms A panel data analysis of partial adjustment models», Christian Andres a, André Betzer a, Marc Goergen b, Luc Renneboog, Journal of Empirical Finance 16 (2009) 175–187 9) « Dividend policy in Nordic listed firms”, Tor Brunzell a, Eva Liljeblom b, Anders Löflund b, Mika Vaihekoski, Global Finance Journal 25 (2014) 124–135 10) The behavioral foundations of corporate dividend......

Words: 2849 - Pages: 12

Linear Dividend

...9-204-066 REV: FEBRUARY 11, 2004 MALCOLM P. BAKER ALISON BERKLEY WAGONFELD Dividend Policy at Linear Technology It was April 2003 and Paul Coghlan was pulling together his notes for Linear Technology’s board meeting the following day. As chief financial officer of the Silicon Valley semiconductor company, Coghlan was responsible for making a recommendation about whether or not Linear should increase its dividend this quarter. Coghlan and Linear’s CEO Robert Swanson were pleased with the company’s third-quarter financials for fiscal year 2003, but sales and net income still remained substantially below Linear’s record levels set in 2001. In addition, the technology industry was still emerging from a recessionary environment and it was unclear how strong business would be for the remainder of the year. Linear Technology Corporation Headquartered in Milpitas, California, Linear was founded in 1981 by Robert Swanson. Under his leadership, the company focused on designing, manufacturing, and marketing integrated circuits (semiconductors) that were used in various electronic applications such as cellular telephones, digital cameras, complex medical devices, and navigation systems. Linear’s customers spanned numerous industries and no single customer accounted for more than 5% of its business. In 2002, the communications industry accounted for 33% of Linear’s business, computers 27%, automotive 6%, and the remaining 34% was spread across many different......

Words: 8046 - Pages: 33

Dividend Policy

...topics we will cover in this course -- and the cases which address each topic. TOPIC Capital Structure/Dividend Policy Capital Structure Options Capital Structure Execution Valuation Security Design/Corporate Governance Financial Distress Restructuring Mergers & Acquistions Merger Arbitrage Mergers & Acquisitions Bidding Corporate Restructuring International Finance/Risk Management Emerging Markets & Comprehensive CASE INTEL AVON MARRIOTT PINKERTON ALZA CUMBERLAND PARAMOUNT 93 PARAMOUNT 94 CONRAIL USX JAGUAR PEPSI You will find that the cases we will discuss in this course which are on a topic previously covered are covered in a sophisticated manner here. Again, the intention is to limit redundancy in your education as well as provide you with the toughest challenges. The end result, however, is that the cases we will cover in this course are quite difficult. Below is the schedule for when we will cover various cases. This is tentative and may be adjusted as the course proceeds; although, I expect little deviation from the plan. In addition, note that I will occasionally interject some lecture-ish moments. These will generally happen when I am summarizing a concept and will often be accompanied with handouts. V. Class Schedule TBD Class 1 2 3 4 5 6 7 8 9 10 11 12 Topic (cases in caps) Introduction: INTEL Dividend Policy: AVON Capital Structure: MARRIOTT Valuation: PINKETON Security Design: ALZA Distress......

Words: 4432 - Pages: 18

Dividend Policy

...Contents 1. Introduction 2 2. Dividend payout theories 2 3. Change in dividends only because of necessarily 3 4. Clientele Dividend of Shareholders 6 5. The Taxes Liability as an Effect on Dividend Policy 7 6. Conclusion 7 References 8 1. Introduction Dividend indicates a share profit delivered to shareholders regarding to certain payout ratio. An efficient firm normally saves their finance to wait opportunities from acquisitions which affects earnings realistically. Afterward, the firms can make decision on whether to buy back their shares with their dividend income or to adopt to apply on other activities. However, the decision is depended on many internal and external factors which need to be considered carefully. 2. Dividend payout theories Up to date, dividend policy is a controversial debate in following components: - Level of dividend payment. - Stability of dividends. - Frequency - Dividend announcement. - Investors’ preference. There are three theories related to three theories to the debate: - Dividends are irrelevant - Bird in the hand. - Tax preference. Company managers have less interest on cutting dividends and raising dividend since a stable level of dividend payment might be preferred by investors. The reason behind is that dividend change is considered as signals of management’s view of the future. As such, a change......

Words: 2173 - Pages: 9

Dividend Policy

...debate on how dividend policy affects a firm’s value. Researchers such as Gordon (1959) believed that dividends increase shareholders wealth, Miller and Scholes (1978) considered dividends to be irrelevant and others such as Litzenberger and Ramaswamy (1979) thought that dividends decrease shareholders wealth. As a result, a number of studies have been undertaken to solve the “dividend puzzle”, a concept which tries to answer the question of whether paying dividends actually makes a difference or not. Many economists argue that dividends should not have any effect on the investor’s valuation of the company because the investor is an owner of the firm and should be indifferent to either getting the dividends or having them reinvested in the firm. The above conclusion, nevertheless, has proven futile as, in the majority of the cases; investors do demand some type of a dividend payment (Cohen, 2002). As a result, it’s important for firms to have a dividend policy in order which will help them make decisions regarding paying cash dividend in the present or paying an increased dividend at a later stage. The Determinants of Dividend Policy An optimum dividend policy is one that strikes a balance between current dividends and future growth and should be based on two basic objectives – maximizing the wealth of the firm’s owners and providing sufficient funds to finance growth. The determinants of a firm’s dividend policy are discussed below. The prevailing dividend and corporate...

Words: 2759 - Pages: 12