Finance Essay

2461 Words Jul 11th, 2016 10 Pages
6/20/2016

Corporate Financial Policy
Basics of Corporate Dividend Policy

Objectives
• What is a dividend policy? And how is the process structured? • What are different measures of dividend policy?
• What does empirical evidence suggest about dividend policies?
• Are there any differences in dividend policies across the world?
• What are recent trends in dividend policy?

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Basics of Corporate Dividend
Policy
Dividend Policy and its Mechanics

Dividend Policy
• One of the decisions that a firm has to take is whether to share corporate profits with its shareholders or not.
• And, if a firm decides to share its profits with shareholders, it has to make another decision:
What percentage of profits
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• In this case, the ratio remains constant over time, but the dollar value of dividends changes as earnings change.

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Dividend Policy
• Stable Dollar Dividend Policy: In this case, firm tries to pay a fixed dollar dividend each year.
• Usually, firms and stockholders prefer stable dividends. Dividend Policy
• Small Regular Dividend plus Year-End Extras:
In this case, firm pays a stable dividend and includes an extra year-end dividend in prosperous years. • By identifying the year-end dividend as “extra,” directors hope to avoid asignal that this is a permanent dividend.

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Dividend Policy
Process
• The process of paying dividends is structured around four dates. These dates are:





Dividend Declaration Date
Ex-Dividend Date
Holder of Record Date
Dividend Payment Date

Dividend Policy
Process
• The first date of importance is the dividend declaration date. It is the date on which the board declares the dollar dividend that will be paid for that quarter (or period).

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Dividend Policy
Process
• This date is important because by announcing its intent to increase, decrease, or maintain dividend, the firm conveys information to financial markets.
• Thus, if the firm changes its dividends, this is the date on which the market reaction to the change is most likely to occur.

Dividend Policy
Process
• The next date of importance is the

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