Capital Market Considerations
Yet another set of factors that can strongly affect dividend policy is the extent to which the has access to the capital markets. In case, the firm has easy access to the capital market because it is financially strong or large in size, it can follow a liberal dividend policy. How the firm has only limited access to capital markets, it is likely to adopt low dividend payout such firms are likely to rely more heavily on retained earnings as a source of financing investments.
Firm’s which lean heavily on financial institutions for procuring funds, declare a minimum so that they can remain on the eligible list of these institutions. It is because, in general financial institutions are prohibited by their charter from buying shares in companies which dividends. A company should he paying dividends at a certain minimum rate for at specified number of institutions are significant buyers of securities, some firms that would otherwise have not paid any amount of dividend, would dividend so that they remain on the eligible list.
Finally, inflation is another factor which affects the firm’s dividend decision. With rising prices, funds generated from depreciation may be inadequate to replace obsolete equipment. These firms have to rely upon retained earnings as a source of funds to make up the shortfall. This aspect becomes all the more important if the assets are to be replaced in the near future. Consequently, their dividend payout tends to be low during periods of inflation.