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Over the past three decades about half of the public firms were regular dividend payers, while...

  1. Over the past three decades about half of the public firms were regular dividend payers, while the other half were not paying dividends at all. Assuming wealth maximization of shareholders is a primary objective of the management, explain: a) why some firms choose to pay dividends consistently (give at least three possible reasons); b) why other firms choose not to pay any dividends at all (at least three reasons); c) why some other firms choose to combine stock repurchases and cash dividends (at least three reasons).

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Answer:-

a) Reasons why some firms choose to pay dividends consistently

1) Shareholders expect that the companies return some share of profits and companies want to attract and retain the investors.
2) Companies that pay dividends consistently witness appreciation in their stock prices over a period of time.
3) The companies pay dividends consistently are labeled as stable companies and increases the demand for the stock and leads to appreciation of stock price

b) Reasons why some firms choose not to pay dividends at all

1) Some companies use profits as retained earnings that can be used to reinvest in the company for favorable and profitable opportunities.
2) The companies prefer to repurchase the shares from the market at premium rather than paying dividends to boost the market value of stock which sends signal to the investors about the financial well being of the company.
3)  The dividend payments are subjected to taxes. This can lead to double taxation as both corporate earnings and dividend payments are taxed.

c) Reasons why some firms choose to combine stock repurchases and cash dividends

1) When the companies pay dividends generally the stock price of the company decreases after ex-dividend date, so the company combines both to arrest the fall in market value of stock price.  
2) The combination of stock repurchases with cash dividends boosts the shareholders confidence and the shareholders wealth which leads to demand for the stock and attract new investors.
3) The companies combine stock purchases with cash dividends to utilize the reserves of cash that the company is having. These is a general practice with some IT and Technology companies which do not have much debt and want to utilize the cash in efficient way.

jeff jeffy answered 8 months ago
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