Dividend Policy and the Value of the Firm- a Critical Literature Review
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Date
2016-07Author
Mugambi, Anthony M
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
This independent study paper examines the extent to which dividend policy influences company
value. The study begins by exploring the conceptual background of dividend policy practices,
theories and variables that influence the choice of dividend policy and their effect on value of the
firm. The purpose of this study is to review the theoretical literature and empirical studies on
dividend theories with a view of establishing the progress and the current status of on dividend
policy research. The outcome of this study will help generate research gaps that will form a basis
for a more detailed research study. A detailed analysis of the existing dividend theory and empirical
studies have been constructed, beginning with the land mark paper by Franco Modigliani and
Merton Miller 1961 dividend irrelevance proposition, the challenge to initial propositions and
subsequent developments in theory and empirical tests of the theories by researchers since then.
Among the theories reviewed include clientele effect theory, bird in hand theory, signaling
hypothesis and agency theory. This study has established that dividend policy influences firm value
and the extent by which dividend policy impacts on firm value is intervened by firm profitability,
liquidity and level of Information asymmetry. Availability of growth investment opportunities,
managerial ownership and leverage are key moderating variables in dividend policy and firm value
relationship. Several studies have tried to analyze the impact of key managerial decisions like
dividend policy, capital structure and working capital management on the value of the firm, but so
far results are inconclusive. One of the important outcomes of this study is a recommendation to
investigate the impact of ownership structure on the value of the firm; the outcome of key decisions
like dividend policy depends on the ownership structure of individual firms and this has implication
on the value of the firm. To the investors this study recommends that they should analyze the
profitability and potential investment opportunities for the firm instead of focusing on the dividends
paid by the firm, they should evaluate their cash needs before investing in particular stock because
important managerial decisions like dividend payment for a firm, take into account the composition
of investors, ownership structure, investment opportunities and liquidity of the firm.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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