Question

Would you set different dividend policies based on the perceived demographic of your investor? Does the firm's life cycle impact this decision?

Answer 1

The clientele effect is am important factor in decididng dividend policies. It is true that perceived demographics affect the dividend policy of a company.

If we study the demographics of investors, some group of investors prefer dividend payout , another group of investors prefer capital appreciation. So the demographic of the investors is very important thing and we can set the required dividend policy as per thr preference of the clientele group that the company wants to satisfy. Sometimes one clientele may get dissatified and sell out the stocks due to a change in dividend policy, but the new dividend policy may be attractive to a new clientele group who may want to invest. So it is a dynamic game of adjusting to the needs of investors based on their demographics.

The firm's life cycle also affects dividend policy. When a firm is in its early age, it aims for more investment and has less surplus in hand. In this phase a firm will not like to pay dividend and would prefer to re-invest in the capital projects or in working capital.

When the firm attains maturity , its operations become stable, there are fewer new investments. In this phase the firms consolidate business and generate cash from previous investments. In the maturity stage firms tend to offer more dividends to the stockholders as it has lesser scope for ploughing back profits.

So yes, the firm's life cycle affect the dividend policy decisions.