Professional Documents
Culture Documents
Price=TkP
-t
...
-2
-1
+1 Tk 1
+2
...
Cum-dividend price
Price=Tk(P!1)
Ex-dividend price
Empirical Evidences
Dividends tend to follow earnings Dividends follow a smoother path than earnings
Empirical Evidences
Dividends tend to follow earnings Dividends follow a smoother path than earnings Dividends are sticky
Empirical Evidences
Dividends tend to follow earnings Dividends follow a smoother path than earnings Dividends are sticky Dividend policy tends to follow life cycle of the rm
Empirical Evidences
Dividends tend to follow earnings Dividends follow a smoother path than earnings Dividends are sticky Dividend policy tends to follow life cycle of the rm Dividend policy varies across countries
Stock Dividend
Distribution of more shares to the existing
shareholders
Stock Dividend
Before stock dividend Paid-up capital (100,000- shares @ Tk 10 par) Share premium Retained earnings Total stockholders equity Tk 1,000,000 1,500,000 800,000 Tk 3,300,000
After 10% stock dividend (Market price Tk 30) Paid-up capital (110,00- shares @ Tk 10 par) Share premium Retained earnings Total stockholders equity Tk 1,100,000 1,700,000 500,000 Tk 3,300,000
Stock Split
Dividing the pie into smaller pieces Number of shares increases Par value falls
Stock Split
Before stock dividend Paid-up capital (100,000- shares @ Tk 10 par) Share premium Retained earnings Total stockholders equity After 2-for-1 stock split Paid-up capital (200,000- shares @ Tk 5 par) Share premium Retained earnings Total stockholders equity Tk 1,000,000 1,500,000 800,000 Tk 3,300,000 Tk 1,000,000 1,500,000 800,000 Tk 3,300,000
Stock Repurchases
Open market purchases Tender offer Targeted repurchase Dutch auction
Dividend Vs Repurchase
Firm Dividend Proposed dividend Earnings Market value after dividend Repurchase Earnings Market value after repurchase Per Share 100,000 shares Tk 300,000 Tk 3.00 450,000 4.50 2,700,000 27.00 90,000 shares Tk 5.00 30.00
Tk 450,000 2,700,000
Controversy
about dividend policy
The Dividend is Irrelevant School
Dividend Irrelevance
What a rm pays in dividends is irrelevant Stockholders should be indifferent about
dividend policy
Dividend Irrelevance
Assumptions
No tax advantage or disadvantage No transaction costs No oatation costs Investment decision independent of dividend decision No agency conict
Example
Operating income after taxes = Tk 100m Growth rate = 5% Cost of capital = 10% Reinvestment needs = Tk 50m Number of shares outstanding = 105m
Value to existing Dividends shareholder s Tk 0 Tk 1,100 10.00 1,090 20.00 1,080 30.00 1,070 40.00 1,060 50.00 1,050 60.00 1,040 70.00 1,030 80.00 1,020 90.00 1,010 100.00 1,000
Price per share Tk 10.48 10.38 10.29 10.19 10.10 10.00 9.90 9.81 9.71 9.62 9.52
Dividends per share Tk 0 0.10 0.19 0.29 0.38 0.48 0.57 0.67 0.76 0.86 0.95
Total value per share Tk 10.48 10.48 10.48 10.48 10.48 10.48 10.48 10.48 10.48 10.48 10.48
Homemade Dividends
Date 0
Tk 11
B A C
Tk 10
Tk 9
Tk 8.90
Tk 10.00 Tk 11.10
Date 1
Dividend Irrelevance
Does A
not mean price per share will be unaffected rm that has invested in bad projects cannot hope to increase its value to investors by offering them higher dividends
Company Consolidated Bathurst Donfasco Some Petroleum Imperial Oil Newfoundland Light & Power Royal Trustco Stelco TransAlta Average
Premium on Cash Dividend Shares over Stock Dividend Shares (%) 19.30 13.30 0.30 12.10 1.80 17.30 2.70 1.10 7.54
Price Differential between Cash and Stock Dividend Shares Source: Bailey (1988)
Excess Returns around Announcements of Dividend Changes Source: Aharony and Swary (1981)
Clientele Effect
Clustering of stockholders in companies with dividend policies that match their preferences
Clientele Effect
Dividend yieldt = a + b !t + c Aget + d Incomet + e Differential Tax Ratet + "t
Clientele Effect
Variable Constant Beta coefcient Age/100 Income/1000 Differential tax rate Coefcient 4.22% -2.145 3.131 -3.726 -2.849 Higher beta stocks pay lower dividends Firms with older investors pay higher dividends Firms with wealthier investors pay lower dividends If ordinary income is taxed at a higher rate that capital gains, the rm pays less dividends Implies
Clientele Effect
Firms get the investors they deserve Firms will have a difcult time changing an
established dividend policy