Theory Of Dividend Policy

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Dividend policy has been very crucial and unanswerable question when it is discussed with the stock price volatility. Many researchers have contributed their efforts to study the relation between dividend policy and stock price, but came up different results and explanations. Mahira and Hashemijoo et al (2012) describes the same thing i-e dividend policy has been the topic of interest for many decades and no acceptable explanation figured out which could tell the relationship, stating there is no consensus among the researchers about the impact of dividend policy on share price. Moreover, the first question of dividend policy comes is what defines the dividend policy? Hashemijoo et al (2012) defines dividend policy as it relates to the firms…show more content…
He also made certain assumptions which were; firms doing all investments through retained earnings, no debt and equity issued by a firm and stated that all the earnings of a firm are either invested or fully kept as retained earnings. The Walter’s model mixed the dividend policy and investment policy because the cost of capital and rate of return can never be equal and firms do not only rely on the internal finances they also opt an option for external…show more content…
This model used mostly as compared to the earlier models. There were some assumptions which were also made under this model and those were; firm is all an equity firm with no external financing, internal rate of return and discount rates of return are constant and corporate taxes do not exist. This theory is known as Bird in Hand Theory. But this theory was also not acceptable because this model also made unrealistic assumptions; constant internal rate of return means no increase in firm's wealth and constant discount rate depicted firm do not consider business risk in their valuation, which could give less reliable valuations of a firm. Osman, M. H. B. (2012) in his paper describes that three models of dividend policy give no real explanation that help management to make correct divide policy for shareholder maximization. Many researches have taken place to understand function dividend policy and the approaches used by management for share value. In order to give most shareholder wealth management has to consider many financial and non-financial factors before coming towards the final decision of dividend

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