Dividends policy are defined that a payout made by a company to its shareholder members. When a company made a profit, managers always put those money to two uses: one is reinvested in the business; the other one is paid to shareholders as dividends. As M&M argued, there are no link between dividends and shareholder value in the perfect market environment. On the other hand, difference distribution for dividend will cause shareholder wealth gain or loss. For example, clientele effect, agency theory, 'bird-in-the-hand' theory and also tax reasons will efficiently demonstrate the change of dividend distribution. Following part will be discussed effect of dividend distributions under tax policy changed.
In the real world, as Wall Street reported that, UK government decided rising tax to 62% of profits from 50% on new field, and up 81% from 69% on older field on North Sea oil earnings. It will not only effect the oil price going down, but also cause the company devalue of their share prices and influence the investment action. For example, EnQuest, a 100% UK based company, it gained the average oil price of $75 per barrel, and its Net Asset Value (NAV) is 95 pence. If its oil price rise to $80 per barrel from $75, its NAV would declined by 13%, because of the change of tax policy by UK government.
If a company's shareholders pay more tax on dividend than their capital gains, they prefer to choose lower dividend distributions. According to Arnold (2008) shows than the UK capital gains are taxed at 18 per cent in the recent year. However, it is much higher tax payout in the oil industry comparing with others. So the useful solution showed by Brown, he encourage the corporations choice lower dividend,higher investment under the tax systems. If a corporation decide lower their dividend for shareholders, the company will reduce liability as much as they can. And using those funds put on the investment also increase their shareholders wealth.
In conclusion, tax systems will effect the distributions of dividends on shareholders. In order to maximise shareholder wealth, managers tend to choose the best way to distribution dividends and volume of investments.
I agree with you that dividend influence shareholders wealth. But do you think that dividends have effect on the shareholders behaviour? I do. If a company change the dividend policy, shareholders can sell their share, which is bad for the firm. Because each shareholders chooses invest into the company whether the company pays dividend or prefer to not to pay dividend but increases the market share price by investing money into positive project.
ReplyDelete