企业价值与股利政策英文文献

Divide nd policy and firm value
The divide nd decisi on is an in tegral part of the firm's strategic financing decisi on .It essentially invoIves a firm's directors deciding how much of the firm's earnings, after in terest and taxes (EAIT, should be distributed to the firm's ordi nary shareholders in return for their investment in the firm, and how much should be retained to finance future growth and developme nt. (Sterk and Vanden berg 2004 441-55The objective of the firm's divide nd decisi on, like all finan cial decisi ons, should be the maximisatio n of shareholder wealth. If an optimal divide nd policy does exist the n clearly man agers should concern themselves with its determ in ati on; if it does not, the n any divide nd policy will do, as one policy will be equal to ano ther. It should be no ted that the divide nd decisi on and divide nd policy relate only to ordinary share capital. (Asquith and Mullins 2003 77-96The payme nt of prefere nee share divide nds is not con sidered part of a firm's divide nd policy, as the level of, or method of calculat ing, the prefere nee divide nd is fixed in adva nee by the terms and con diti ons of the orig inal prefere nce share offer. Once a divide nd policy has bee n formulated, sett ing out the amount and tim ing, etc. of divide nd payme nts, it should be followed with stability and consistency as its guiding principles. As we shall discuss later, cha nges to a firm's divide nd policy can be in terpreted in various ways by the finan cial markets, sometimes with dramatic con seque nces for the firm's share price. You will note that the divide nd decisi on is made at the level of the firm's most senior man agers - at board of director level. It is the directors who will decide the amount and timi ng of divide nd payme nts. Un der UK compa ny law the directors cannot be compelled to recomme nd a divide nd and shareholders cannot vote themselves a higher divide nd tha n that recomme nded by the directors. (Bajaj and Vijh 2004 193Payme nt of divide ndsln the UK, in com mon with many other coun tries, divide nds are usually paid to shareholders twice a year. An interim payment is made half-way through the financial year, with a final payme nt being made after the end of the finan cial year. Divide nds are paid to the shareholders listed on a firm's Share Register on a specified date, known as the Record Date. (Sterk and Vandenberg 2004 441-55 In the stock market, shares of listed companies are traded on what is known as either a cum-divide nd or ex-divide nd basis. A listed compa ny's shares are traded cum-divide nd for a period after the compa ny announ ces its results, in terim and fin al. When the shares are tradi ng cum-divide nd, buyers of
the shares will be en titled to
receive the divide nd payme nt. When the shares are trad ing ex-divide nd, buyers will not be en titled to receive a divide nd payme nt. This expla ins why (assu ming the abse nee of any other releva nt factors there is usually a drop in a share's price, roughly equivale nt to the value of the divide nd per share, whe n the share goes ex-divide nd. (Imps on 2005 422-27For in sta nee, distributi ng capital or certa in types of reserves (e.g. share premium acco unt as divide nds is prohibited by compa ny law. The determ in ati on of distributable profits is set out in a detailed code of statutory regulations. For public and private compa ni es, the Compa nies Act 2003 defi nes distributable profits as: 'accumulated realised profits, so far as not previously utilised by distribution or capitalisation, less accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made'. These legal restrictions on the payments of divide nds are n ecessary to mai ntai n the capital of a compa ny and to protect the rights and claims of creditors. The releva nee (or irreleva nee of divide nd policy to the value of the firm has been one of the most widely researched topics in finance and accounting.
Argume nts have bee n adva need on all sides of the issue. Give n the in ability to structure a sin gle con ceptual relati on ship betwee n divide nd policy and the value of the firm, empirical studies of the relati on ship betwee n divide nds and firm value have take n on in creased importa nee. Previous studies have used either short-r un measures of stock price or risk-adjusted returns to measure firm value. (Jose and Steve ns 2004 652Divide nd announcement studies hav e xamined the immediate reaction of the firm ' s stock price to a divide nd announ ceme nt to determ ine if the stock price falls by more or less tha n the amount of the divide nd. Findings from announ ceme nt studies suggest that inv estors disco unt divide nds. Other studies have tested for the relati on ship betwee n risk-adjusted retur ns and divide nd yield. Using short -run hold ing periods, these studies have found that in vestors require higher risk-adjusted returns from higher divide nd yield stocks. While there are con troversies over the short-r un measures and assumpti ons of asset pric ing models relating returns to firm value, the empirical findings have consistently suggested that higher divide nd commitme nts lower the value of the firm. (Bernste in 2005 4- 15Multiple Measures of Divide nd PolicyDivide nd "policy" implies a con scious
man ageme nt of divide nd distributi ons over time. Surveys in dicate that man agers tend to focus on the payout ratio in the long run, but smooth divide nds in the short run. (Baker et al 2004 1-8 In the Ion ger run, the level of the firm's average payout ratio captures the firm's commitme nt to the level of divide nd distributi on out
of earnings. However, over time the firm need not adhere to the same short-run payout ratio to accomplish the Ion ger-r un objective uni ess earnings are stable. If divide nds per share are con sciously smoothed relative to earnin gs, the firm's payout ratio will be volatile. The greater the volatility in the payout ratio, the greater the smoothing of divide nds. The volatility of divide nds around their trend reflects the in here nt divide nd stability aspects of the policy. (Woolridge 2002 237-47Measures of the average payout ratio (APOR, divide nd stability around the divide nd time trend (R2LDPS, and payout ratio volatility (SDPOR are used to represe nt the firm's policy with respect to divide nd levels, stability, and smooth ing. The divide nd payme nt In practical terms a firm's divide nd payme nt is importa nt to its shareholders. It is part of the return which shareholders receive for their in vestme nt in the firm. The divide nd payme nt is also a favoured method by which shareholders and inv estors estimate a firm's share value, where the value of a share is equal to the prese nt value of the expected future divide nd payme nts - the divide nd valuatio n model Notice the tendency for the final divide nd to be sig nifica ntly greater tha n the in terim - this is the com mon, finan cially prude nt, approach adopted by most compa ny boards. (Michaely 2005 573Clearly directors will wish to be certa in of how a compa ny has performed for the year overall, before committi ng valuable cash resources to a divide nd payme nt. Shareholders, depe nding upon the in dividual compa ny's articles of associati on, may have the right to receive divide nds in the form of fully paid ordinary shares in stead of cash, if they so elect. Un der such a pla n shareholders can, if they wish, use the en tire cash divide nd to buy additi onal shares of the compa ny in the market, usually at a competitive dealing rate. (Christie 2004 459-80Dividend coverThe divide nd cover ratio in dicates the vuln erability, or the margi n of safety, of divide nd payme nts to a drop in earnin gs. Notwithsta nding the aboliti on of ACT, tax credits will con ti nue to be available to in dividual shareholders reside nt for tax purposes in the UK, although the amount of the tax credit will be reduced to one-ninth of the amount of the n et, or cash divide nd - equivale nt to 10 per cent of the
gross divide nd. Lower and basic rate taxpayers, as before 6 April 2006, will have no farther liability to tax on their divide nds. Higher rate tax payers will, as before, be able to offset the tax credit aga inst their liability to tax on the gross divide nd. UK reside nt in dividual shareholders who are not liable to in come tax in respect of the divide nd will not gen erally be en titled to reclaim any part of the tax credit. Tax credits are no Ion ger available to UK pension fun ds. (Baker et al 2003 78-84U nder legislati on in troduced in the Finance
(No. 2 Act 2005, UK pension funds are not entitled to reclaim the tax credits on divide nds paid to them by a compa ny. Similarly, after 6 April 2006 tax credits in respect of divide nds paid, which con stitutes the in come of a charity or ven ture capital trust, will not be repaid. There is some speculati on that, in the future, compa nies may in crease their divide nd distributi ons to compe nsate these inv est ing in stituti ons for the loss of their tax credits. (Miller 2003 1031Over time many theories on divide nd policy, ofte n con troversial on es, have emerged. The cen tral area of con troversy has, and continues to be, concerned with whether or not there is a real conn ecti on betwee n divide nd policy and the market value of the firm .In this sect ion we will review the followi ng mai n theories of divide nd policy:1 the residual theory of divide nd policy;2 divide nd irreleva ncy theory;3 the bird-i n-the-ha nd theory;4 divide nd sig nalli ng theory;5 the divide nd clie ntele effect;6 age ncy cost theory.
The residual theory of divide nd policyThe esse nee of the residual theory of divide nd policy is that the firm will only pay divide nds from residual earnin gs, that is, from earnings left over after all suitable (positive NPV inv estme nt opport un ities have bee n finan ced. Recall from the previous chapter that, accord ing to Myers' Peck ing Order Theory, managers will prefer to utilise retained earnings as the primary source of investment financing, before resorting to issuing debt or equity. Retained earnings are the most importa nt source of financing for most compa ni es. (Ang 2003 They are a cheaper source of finance than making a fresh issue of equity due to expensive equity issue costs (e.g. advertis ing, brokerage and un derwrit ing fees. The existe nee of these issue costs - which are examples of real world market imperfections it is suggested by some theorists, would lead compa nies to favour using retai ned earnings to finance in vestme nt projects rather tha n making a fresh equity issue. This implies a residual approach to divide nd policy, as the first claim on retained earnings will be the financing of investment projects. With a residual divide nd policy, the primary focus of the firm's man ageme nt is in deed on in vestme nt, not divide nds. Divide nd policy becomes irreleva nt; it is treated as a passive, rather tha n an active, decisi on variable. (Crutchley 2004 36-46The view of man ageme nt in this case is that the value of the firm and the wealth of its shareholders will be maximised by inv esti ng earnings in appropriate in vestme nt projects, rather tha n pay ing them out as divide nds to shareholders. Thus man agers will actively seek out, and inv est the firms earnings in, all acceptable (in terms of risk and return inv estme nt projects, which are expected to
in crease the value of the firm. Divide nds will on ly be paid whe n retai ned earnings exceed the funds required to finance suitable investment projects. Conversely, when the total inv estme nt funds required exceed reta ined earnin gs, no divide nd will be paid. (Sterk and Vanden berg 2004 441-55Divide nd irreleva ncy theoryDivide nd irreleva ncy theory asserts that a firm's divide nd policy has no effect on its market value or its cost of capital. As we discussed in the preced ing secti on, divide nd irreleva ncy is implied by the residual theory, which suggests that divide nds should only be paid if funds are available after all positive NPV projects have bee n finan ced. (Ofer and Thakor 2003 365 The theory of divide nd irreleva ncy was perhaps most elega ntly argued by its chief prop onen ts, Modiglia ni and Miller (usually referred to as M&M in their semi nal paper in 1961. I n the
same manner in which they argued for capital structure irreleva ncy M&M assert that the value of a firm is primarily determ ined by its ability to gen erate earnings from its in vestme nts and by its level of bus in ess and finan cial risk. They argue that divide nd policy is a 'passive residua l' which is determ ined by a firm's n eed for in vestme nt fun ds. Accord ing to M&M's irreleva ncy theory, it therefore does not matter how a firm divides its earnings betwee n divide nd payme nts to shareholders and internal rete ntio ns. In the M&M view the divide nd decisi on is one over which man agers n eed not ago ni se, tryi ng to find the optimal divide nd policy, because an optimal divide nd policy does not exist. M&M built their divide nd irreleva ncy theory on a range of key assumpti ons, similar to those on which they based their theory of capital structure irreleva ncy. For example they assumed:? Perfect capital markets, that is, there are no taxes (corporate or pers on al, no transaction costs on securities, investors are rational, information is symmetrical - all in vestors have access to the same in formati on and share the same expectati ons about the firm's future as its man agers. (Miller and Scholes 2002 1118? The firm's in vestme nt policy is fixed and is in depe ndent of its divide nd policy. You may con sider that the theory can be dismissed because the underlying assumptions are simplistic and idealistic. However, as M&M themselves argued, all econo mic theories are based on simplify ing assumptions, and it is not their lack of realism which matters but the ability of the theory itself to stand up to empirical testing. The model's robustness can be tested by introducing real-world factors and observ ing their effect. (Peters on and Ben esh 2003 449-53Divide nd sig nalli ng theoryIn practice, cha nges in a firm's divide nd policy can be observed to have an effect on its share price - an in crease in divide nds produc ing a in crease in share price and a reduct ion in divide nds
producing a decrease in share price. This pattern led many observers to conclude, con trary to M&M's model, that shareholders do in deed prefer divide nds to future capital gai ns. Needless to say M&M disagreed. (Crutchley 2004 36-46 M&M suggested that the cha nge in share price follow ing a cha nge in divide nd payme nt is due to the in formatio nal content of the divide nd payme nt, rather tha n the divide nd payme nt itself. In other words, the cha nge in divide nd payme nt is to be in terpreted as a sig nal to shareholders and in vestors about the future earnings prospects of the firm. Gen erally a rise in divide nd payment is viewed as a positive signal, conveying positive
information about a firm's future earnings prospects result ing in an in crease in share price. Con versely a reducti on in divide nd payme nt is viewed as a n egative sig nal about future earnings prospects, resulting in a decrease in share price. As we discussed in relation to capital structure in the previous chapter, signalling theory argues that shareholders and the investing community understand these issues; that managers have more information about a firm's future prospects (in formati on asymmetry and use divide nd and financing policy to sig nal this information to their less well-informed shareholders and investors. (Soter et al 2005 4-15The divide nd clie ntele effectThe divide nd clie ntele effect is a feature of M&M's divide nd irreleva ncy theory .In relatio n to divide nd policy, M&M argued for the existe nce of a clie ntele effect, where the n ature of a firm's divide nd policy will attract a particular clie ntele of shareholders. In vestors who prefer in come to capital growth will be attracted to compa nies with high divide nd payout policies and vice versa. For example, many charities, pension funds and retired senior citizens, have a need for a stable, regular in come to meet their operat ing expe nses and other finan cial commitme nts. (Barclay et al 2005 4-19 With regard to charities (and also other institutions such as universities which receive en dowme nts and legacies ofte n the terms and con diti ons of en dowme nts will prohibit a charity's trustees from spe nding the capital sum en dowed. The capital en dowme nt therefore has to be in vested, in perpetuity, to gen erate in come. In such circumsta nces, in vesti ng in high divide nd pay ing compa nies has its appeal. I n con trast, other groups of inv estors who (perhaps for taxati on reas ons, where an in vestor's capital gains may be taxed at a lower rate tha n the in vestor's in come may prefer capital growth to in come will be attracted to firms with high earnings rete nti on and low divide nd payout
policies. In the main, the existe nee, or otherwise, of inv estor clie nteles is gen erally con sidered to have no effect on an in dividual firm's share value. Any sudde n and dramatic cha nge of policy is
likely to cause a similar, sudden and dramatic shift in its shareholder clientele and possibly in its share price. Shareholders and investors who find the new policy meets their n eeds will be attracted to the firm. Any exist ing shareholders who no Ion ger find the policy suitable will sell their shares. (Healy 2004 149Growth stageDividend policy is likely to be in flue need by a compa ny's growth stage. For example, a young, rapidly grow ing compa ny is likely to have a high dema nd for developme nt finan ce. In such circumsta nces divide nd payme nts may be strictly limited or eve n
deferred un til the compa ny reaches a mature growth stage. (Be nartzi et al 2005 1007Ow nership structureA firm's divide nd policy may be drive n by its own ership structure. Normally in small firms, where owners and man agers are one and the same, divide nd payouts tend to be very low, or eve n non-existe nt. (Crutchley 2004 36-46 Whereas large, quoted public compa nies tend to pay out sig nifica nt proporti ons of their earnings as divide nds in small firms, the values and preferences of a closely knit, small group of owner-managers will exert a more direct in flue nce on divide nd policy. It is also in teresti ng to note that, almost without excepti on, whe n private compa nies become public their divide nd payouts in crease. (Ofer and Thakor 2003 365Shareholder expectati on sShareholder clie nteles that have become accustomed to recei ving stable, and possibly in creas ing, divide nds will reas on ably expect a similar patter n of divide nd payme nts to continue in the future. Any sudde n reducti on or reversal of such a policy is likely to in cur the wrath of these shareholders, perhaps eve n prompting them to dispose of their shares and causing the share price to fall. (Pruitt and Gitma n 2004 409-30Share repurchases schemes In the UK the ability of a compa ny to repurchase its shares became legal following the introduction of the 1981 Companies Act. However, it is only in recent years that the practice of initiating share repurchase, or buyback, schemes has become a very popular way for compa nies (ma inly in the UK and in the US, which have accumulated substantial balances of surplus cash, to return some of this cash to their shareholders. (Easterbrook 2003 650-58Market sig nalli ngSimilar to divide nd sig nalli ng, share repurchases can be used to sig nal in formatio n about the company's future prospects to the financial markets. For example, by initiating a share repurchase, directors, who have in side kno wledge about the compa ny, may be tryi ng to convince the finan cial markets that the compa ny's share are un dervalued. For example, when Rio Tinto (the largest mining company in the world and listed on both the UK and Australia n stock markets announ ced in January 2006 a pla n to buy back up to 10 per cent of its share capital, the compa ny's chairma n publicly stated that: 'We con sider that buying back shares, particularly in curre nt market con diti ons, should achieve earnings per share improveme nt for the shareholders of both compa nies and enhance the un derly ing value of those shares which rema in outsta ndin g.'(Rozeff 2007 249-58SummaryAt this stage it would be helpful to try and summarise the various views on divide nd policy. Miller and Modiglia ni (M&M have dem on strated that, assu ming perfect capital market con diti ons, a firm's divide nd decisi on is irreleva nt; divide nd policy
has no in flue nee on share value. (Ofer and Thakor 2003 365 Therefore, in a perfect market, it does not matter whether a firm has a divide nd policy or no t. I n the real world, market imperfecti ons, such as taxati on and tran sacti on costs, do exist. Expensive equity issue costs (e.g. underwriting and brokerage fees would in duce firms to use in ternally gen erated fun ds, that is, rete ntio ns, to finance positive NPV in vestme nts, rather tha n make a fresh equity issue. This, some theorists argue, leads to a residual approach to divide nd policy. Earnings will be primarily used to fund inv estme nts; divide nds will be paid from any earnings rema ining after all suitable inv estme nts have bee n fun ded. (Ghosh and Woolridge 2004 281-94In additi on, inv estors who, because of their in dividual finan cial circumsta nces, prefer steady in come to capital growth or vice versa, create a clientele effect - a firm will attract the investor clientele to which its divide nd policy most appeals. But the existe nee of clie ntele group ings is gen erally con sidered irreleva nt. (Smirlock and Marshall 2003 1659-67It is argued that clie nteles have no effect on an in dividual firm's share value as long as there are eno ugh shares
widely available in the capital markets to satisfy the needs of various clienteles. A firm's share value may also be affected by other market imperfecti ons such as in formati on asymmetry, where the in formatio n content or sig nalli ng effect of divide nds seems to be releva nt. (Ofer and Thakor 2003 365 Therefore a firm's man ageme nt should be wary of making any sudde n and dramatic cha nges, particularly reducti ons, to a firm's divide nd policy, as this will probably also cause a sudden and dramatic change in its shareholder clientele and probably its share price. The available evidence would suggest that a firm mai ntai ns a stable and con siste nt divide nd policy over time. (Rozeff 2007 249-58The main stream, modem age ncy cost view of divide nd policy argues for the valuable role of divide nd policy in help ing to resolve the age ncy problem, reduci ng age ncy costs, and thus in enhancing shareholder value. Agency cost theory would imply that firms adopt high divide nd payout policies; after all suitable inv estme nt projects have bee n finan ced. (Be nesh et
al 2003 131-40 Although the jury is still out o n divide nd policy, and there is no gen eral consen sus on the relati on ship betwee n divide nd policy and share value, the empirical evidence available would seem to suggest that, at least in practical terms, divide nd policy is highly releva nt to corporate man agers, shareholders and inv estors, particularly the large institutional investors. (Farrelly 2003 62-74lt would only seem logical therefore that this behavioural aspect of divide nd
policy is recog ni sed by a firm's man agers in the formulatio n of its own divide nd policy. It is in trigui ng that, over twenty years later, and despite voluminous academic research, the two basic questi ons posed by Fisher Black, in his famous article 'The Divide nd Puzzle' in 1976: (1 Why do corporati ons pay divide nds? And (2 why do inv estors pay atte nti on to divide nds? Still rema in without defi nitive an swers.
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