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# Learning Objectives - Understand dividend policy theories - Evaluate stock repurchases vs. dividends - Analyze factors affecting dividend decisions ## 1.
Learning Objectives
- Understand dividend policy theories
- Evaluate stock repurchases vs. dividends
- Analyze factors affecting dividend decisions
1. Dividend Irrelevance Theory
Miller-Modigliani: In perfect markets, dividend policy doesn't affect firm value.
2. Bird-in-Hand Theory
Investors prefer current dividends over future capital gains (less risky).
3. Tax Preference Theory
If dividends are taxed higher than capital gains, investors prefer low dividends.
4. Signaling with Dividends
Dividend increases signal positive future prospects. Dividend cuts signal problems.
5. Stock Repurchases
Alternative to dividends. More flexible, tax-advantaged (capital gains vs. ordinary income).
| Theory | Prediction |
|---|---|
| Dividend Irrelevance | Policy doesn't matter |
| Bird-in-Hand | Higher dividends preferred |
| Tax Preference | Lower dividends preferred |
| Signaling | Dividends convey information |
| Clientele Effect | Different investors prefer different policies |
Q1: Why do stock prices often fall when dividends are cut?Signaling effect - investors interpret cut as negative news about future earnings. Q2: Compare stock repurchases and dividends.Both distribute cash. Repurchases are more flexible, tax-advantaged for investors, and don't create expectation of future distributions. Q3: What is the clientele effect in dividend policy?Different groups of investors prefer different dividend policies (retirees like dividends, growth investors prefer capital gains). Join Discord PreviousCapital Structure TheoryNextValuation Methods