Dividend Policy and International Financing
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24-02-2011, 12:16 PM

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Dividend Policy and International Financing
Stock Returns

Dilemma: Should the firm use retained earnings for:
a) Financing profitable capital investments?
b) Paying dividends to stockholders?
Financing Profitable Capital Investments:
If we retain earnings for profitable investments,
Paying Dividends:
So, dividend policy really involves two decisions:
 How much of the firm’s earnings should be distributed to shareholders as dividends, and
 How much should be retained for capital investment?
Is Dividend Policy Important?
Three viewpoints:
1) Dividends are Irrelevant
2) High Dividends are Best
3) Low Dividends are Best
Three viewpoints:
1) Dividends are Irrelevant. If we assume perfect markets (no taxes, no transaction costs, etc.) dividends do not matter. If we pay a dividend, shareholders’ dividend yield rises, but capital gains decrease.

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