Essays on dividends
Ασημακόπουλος, Παναγιώτης Ν.
Dividend policy has drawn a lot of attention in financial literature. The div¬idend decision is one of the most extensively researched topics in the finance area and it has remained one of the toughest challenges for financial econo¬mists. Dividends are commonly defined as the distribution of earnings (past or present) among the shareholders of the firm in proportion to their owner¬ship. The term dividend policy means the practice that the management, as well as the board of directors, follows in making dividend payout decisions or, in other words, the size and pattern of cash distributions over time to shareholders. Corporate managers make two main decisions: the investment (or cap¬ital budgeting) and the financing decision. The capital budgeting decision illustrates the real assets that the firm should acquire, while the financing decision illustrates how these assets should be financed determining the cap¬ital structure of a corporation. However, the financing decision determines another type of decision as well: the dividend policy. The dividend policy determines, on the one hand, the amount of earnings that are available as a source of financing and, on the other hand, the amount of earnings paid as dividend. A starting assumption in the majority of the academic finance literature is that managers should maximize the wealth of firm’s shareholders, which translates into maximizing the value of the company as measured by the price of the company’s common stock. Thus, they should set their dividend payments according to this objective. This goal can be achieved by giving the shareholders a “fair” payment on their investments. The most important questions to be answered concerning dividend pol¬icy are: How much cash should firms give back to shareholders? What form should the payment take? Should corporations pay their shareholders through dividends or by repurchasing their shares? Which is the least costly form of payout from a tax perspective? Firms must take these important decisions period after period (some must be repeated and some need to be revaluated each period), on a regular basis. According to Allen and Michaely (2002), because these decisions are dy¬namic they are labeled as payout policy. The world policy implies some consistency over time, meaning that the payout and dividends in particular, do not simply evolve in an arbitrary and random manner. Payout policy is important not only because of the amount of money involved and the repeated nature of the decision, but also because payout policy is closely related to, and interacts with, most of the financial and investment decisions that the firms make. Understanding payout policy may lead to a deeper understanding of other pieces in this puzzle. Theories of capital structure, mergers and acquisitions, asset pricing and capital budgeting; all rely on a view of how and why firms pay out cash. The three most popular ways by which companies can set their pay¬out policies are: through cash dividends, stock dividends and repurchasing shares. This thesis will focus on the former of these ways, the cash dividends, since it examines both the effect of dividend announcement in firm’s share price and the ex-dividend day anomaly at the Greek stock market, where neither stock dividends nor share repurchases are popular ways of payout.