Dividend Management Literature Review

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Literature review The impact of dividend payout decisions on the performance of manufacturing firms in Mauritius. Dividend Dividend can be referred as a proportion of the after-tax profit made by a company, distributed among its shareholders according to the quantity of shares held by them. Normally, smaller companies pay dividend yearly, that is, at the end of the accounting period while big firms usually pay dividend quarterly. It is the board of directors who decide upon the amount and timing of the dividend and they also decide whether the dividend is paid out of the current earnings or the past earnings kept as reserve. Introduction to dividend strategy The dividend strategy of a company decides upon what amount of earnings is paid to…show more content…
Declining firms make returns that are not exactly what shareholders can earn on their investments. Thus, it is not a better idea to hold the company’s earning. Actually, the best option is to boost the price of the share to distribute whole income to shareholders. The optimum dividend payout ratio, in such circumstances is 100%. Criticism Walter’s model is very helpful to demonstrate the impacts of dividend strategy on all equity firms under distinctive assumptions about the rate of return. However, the basic nature of the model can prompt conclusions which are not yet valid in general, however valid for Walter’s model. The criticisms on the model are as follows: Walter’s model of share valuation blends dividend strategy with investment strategy of the company. The model expects that the investments chances of the company are funded by retained earnings only and the external financing obligation or equity is utilized for the reason when such a circumstances exists either the company’s investment or its dividend strategy or both will be sub-optimum. The owner’s wealth will expand only when this investment is made. Walter’s model is assuming that r is consistent and cost of capital as well. The business risk will obviously change with more investment which is not reflected in this…show more content…
Nonetheless, as expressed by Ball et al. (1979, p.14), empirical tests of MM “dividend irrelevance theorem have proven difficult to design and conduct”. Recall that MM based their determinations on a certain arrangements of perfect capital markets. Relaxing one or a greater number of suppositions has structured the basis for the majority of theoretical and empirical studies. In accordance with the dividend irrelevance theory, Black and Scholes (1974) inspected the relationship between dividend yield and inventory returns to recognize the impact of dividend strategy on inventory prices. They built a portfolio consisting of 25 common stock listed on the New York Stock Exchange (NYSE), developing the capital assets pricing model (CAPM) to test the long run assessment of dividend yield impacts. The true CAPM says that expected return on any security should be a linear function of its β as follows: E (Ṙ_i) = R + [E (Ṙ_m) – R] β_i Where, E (Ṙ_i) = the expected Return on security

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