Framework

Dividend policy theories

The question it answers

When the company makes a profit, should the board pay it out as dividends or keep it for reinvestment, and what will that payout signal to investors?

Origin
Miller and Modigliani (1961); Gordon (1959); Lintner (1956; 1962); Bhattacharya (1979); Miller and Rock (1985); Easterbrook (1984); Black and Scholes (1974)
Diagram type
Comparison table
Level of analysis
Firm
Topics
Corporate finance
Stack of clay coins beside a rising glass bar chart, icon for finance

Diagram

Dividend policy theories

CriterionClaimMechanism or limit
IrrelevancePayout does not change value in perfect marketsInvestors make home-made dividends; real frictions break it
Bird in handCash now is preferred to uncertain gainsModigliani and Miller call it irrational
SmoothingPartial adjustment toward a target payoutDescriptive rather than causal
SignallingDividend reveals private newsThe signal has a cost
Agency and clienteleDividends discipline cashTax-driven investor clienteles

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Bhattacharya, S. (1979) ‘Imperfect information, dividend policy, and 'the bird in the hand' fallacy’, Bell Journal of Economics, 10(1), pp. 259–270.doi:10.2307/3003330Source page
  2. Black, F. and Scholes, M. (1974) ‘The effects of dividend yield and dividend policy on common stock prices and returns’, Journal of Financial Economics, 1(1), pp. 1–22.doi:10.1016/0304-405x(74)90006-3Source page
  3. Easterbrook, F.H. (1984) ‘Two agency-cost explanations of dividends’, American Economic Review, 74(4), pp. 650–659.No DOIchicagounbound.uchicago.eduSource page
  4. Gordon, M.J. (1959) ‘Dividends, earnings, and stock prices’, Review of Economics and Statistics, 41(2), pp. 99–105.doi:10.2307/1927792Source page
  5. Lintner, J. (1956) ‘Distribution of incomes of corporations among dividends, retained earnings, and taxes’, American Economic Review, 46(2), pp. 97–113.No DOISource page
  6. Lintner, J. (1962) ‘Dividends, earnings, leverage, stock prices and the supply of capital to corporations’, Review of Economics and Statistics, 44(3), pp. 243–269.doi:10.2307/1926397Source page
  7. Miller, M.H. and Modigliani, F. (1961) ‘Dividend policy, growth, and the valuation of shares’, Journal of Business, 34(4), pp. 411–433.doi:10.1086/294442Source page
  8. Miller, M.H. and Rock, K. (1985) ‘Dividend policy under asymmetric information’, Journal of Finance, 40(4), pp. 1031–1051.doi:10.1111/j.1540-6261.1985.tb02362.xSource page