Dividend Policy and Capital Market Theory

KNOWLEDGE OF A FIRM'S DIVIDEND POLICY CAN MAKE A SIGNIFICANT CONTRIBUTION TO EXPLAINING THE RETURN RECEIVED ON THE FIRM'S SECURITY. INVESTORS HAVE A GENERAL PREFERENCE FOR RECEIVING THEIR RETURN IN THE FORM OF DIVIDENDS TO RECEIVING IT IN THE FORM OF CAPITAL-GAINS. THEY ARE WILLING TO SETTLE FOR A SMALLER RETURN, HOLDING RISK CONSTANT, PROVIDED THAT IT IS IN THE FORM OF DIVIDENDS RATHER THAN THAT WHICH COULD OTHERWISE BE OBTAINED VIA CAPITAL-GAINS. SECURITY MARKET IMPERFECTIONS AND INSTITUTIONAL FACTORS EXIST IN THE MARKET PLACE TO THE EXTENT THAT THEY HAVE A SIGNIFICANT INFLUENCE ON INVESTOR BEHAVIOR. WELL-DIVERSIFIED INVESTORS WHO HAVE NO NET PREFERENCE FOR DIVIDENDS SHOULD INVEST IN THE SECURITIES OF LOW PAYOUT FIRMS. A FIRM SHOULD ADOPT A HIGH PAYOUT POLICY, ALL OTHER THINGS EQUAL, TO ATTAIN A HIGH PRICE FOR ITS SECURITY. TABLES.