Payment Procedures 2 3 5 EX-dividend period 1 Announcement date 2 Declaration date 3 EX-dividend date 4 Date of record 5 Payment date
Payment Procedures 1 2 3 4 1 Announcement date 2 Declaration date 3 Ex-dividend date 4 Date of record 5 Payment date 5 Ex-dividend period
Three Approaches Dividend policy cannot affect shareholders wealth in a perfect capital market and is therefore irrelevant High dividends are best- relevant Low dividends are best- relevant
Three Approaches ▪ Dividend policy cannot affect shareholders’ wealth in a perfect capital market and is therefore irrelevant. ▪ High dividends are best - relevant. ▪ Low dividends are best - relevant
Relevance Argument Resolution of uncertainty-the 'bird-in- the-hand' argument/fallacy Information content of dividend announcements- signalling
Relevance Argument ▪ Resolution of uncertainty - the ‘bird-inthe-hand’ argument/fallacy. ▪ Information content of dividend announcements – signalling
Relevance Argument Clientele effect tax investors' preferences
Relevance Argument ▪ Clientele effect –tax –investors’ preferences
Relevance Argument Agency costs can be reduced by paying higher dividends Issue costs will be minimised if the firm pays lower dividends Shareholders transaction costs will be higher, the lower the dividend
Relevance Argument ▪ Agency costs can be reduced by paying higher dividends. ▪ Issue costs will be minimised if the firm pays lower dividends. ▪ Shareholders’ transaction costs will be higher, the lower the dividend