Cogito

Does Dividend Payout Policy Have Effect on Firm Value?

Posted in CFA by qmarks on February 17, 2010

Before we begin, let me make it clear, that is under PERFECT capital market conditions where there is no information asymmetry and no taxes (whoa! what a wonderful world)

The intuition behind that dividend payout policy has no effect on firm value is if a firm pays out more than individuals wish, they can undo the cash distribution by acquiring additional shares with the distributed cash.  If, on the other hand, the firm does not distribute cash, individuals can create their home-made cash distribution by selling some of their shares. So my advice to old lads who likes to receive some paychecks quarterly for their investments, mom you can simply sell some of your shares and get some money for your grocery. That is same with receiving dividends. Moreover same situation applies to investors, if you don’t want to receive dividends you can simply receive the payment and reinvest in into the shares.

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