Category Archives: DETERMINANTS OF DIVIDEND POLICY

Control

Control Dividend policy may also be strongly influenced by the shareholders or the management’s control objectives. That is to say, sometimes management employs dividend policy as an effective instrument to maintain its position of command and control. The management, in order to retain control of the company in its own hands, may be reluctant to pay substantial dividends and would funds to finance profit

Earnings Stability

Earnings Stability The stability of earnings also has a significant bearing on the dividend decision of a firm. Generally, the more stable the income stream, the higher is the dividend payout ratio. Such firms are more confident of maintaining a higher payout ratio. Public utility companies are classic examples of firms that have relatively stable earnings pattern and high dividend payout ratio. Growing firms,

Availability of Funds

Availability of Funds The dividend policy is also constrained by the availability of funds and the need for additional investment. In evaluating its financial position, the firm should consider not only its ability to raise funds but also the cost involved in it and the promptness with which financing can be obtained. In general, large mature firms have greater access to new sources for raising funds than firms

Growth Prospects

Growth Prospects Another set of factors that can influence dividend policy relates to the firm growth prospects. The firm is required to make plans for financing its expansion programmed this context, the availability of external funds and its associated cost together with the need investment  funds would have a significant bearing on the firm’s dividend policy. Financial Requirements Financial requiremen

Internal Constraints

Internal Constraints Such factors are unique to a firm and include (i) liquid assets. (ii) growth prospects, (iii) financial requirements, (iv) availability of funds, (v) earnings stability and  (iv) control. Liquid Assets Once the payment of dividend is permissible on legal and contractual grounds, next step is to ascertain whether the firm has sufficient cash funds to pay cash dividends. It will be possible t

Contractual Requirements

Contractual Requirements Important restrictions on the payment of dividend may be accepted by company when obtaining external capital either by a loan agreement, a debenture indenture, preference share agreement, or a lease contract. Such restrictions may cause the firm to restrict payment of cash dividends until a certain level of earnings has been achieved or limit the amount of dividends paid to a certain am

Net Profits

Net Profits Alternatively, a firm cannot pay cash dividends greater than the amount of current profits plus the accumulated balance of retained earnings. For instance, section 205 of the Indian Companies Act provides that dividends shall be paid only out of the current profits or past profits after providing for depreciation. The point to be recognized is that the company can count on the profits of previous y

Legal Contractual and Internal Constraints and Restrictions

Legal Contractual and Internal Constraints and Restrictions The dividend decision is also affected by certain legal, contractual, and internal requirements and constraints. The legal factors stem from certain statutory requirements, the contractual restrictions arise from certain loan covenants and the internal constraints are the result of the firm’s liquidity position. Legal Requirements Legal stipulati

Requirements or Institutional Investors

Requirements or Institutional Investors A third factor encouraging stable dividend policy is the requirement of institutional investors like life insurance companies, general insurance companies, mutual funds and so on, to invest in companies which have a record of continuous and stable dividend. These financial institutions owing to the large size of their investible funds, represent a significant force in the

Informational Contents

Informational Contents Another reason for pursuing a stable dividend policy is that investors are dividends and changes in dividends as a source of information about the farm’s investors know that the firm will change dividends only if the management foresees restrings change, then the level of dividends informs investors about the company’s. Accordingly, the market views the changes in the, dividend