Effect of Dividend Policy - Signaling Theory, Investors and Share Prices - Dissertation Example

Download file to see previous pages The perception of dividends and the changes in the dividend policies of the companies constituting signals to the investors with reference to their investment decisions needs to be analyzed with regard to the circumstances obtained in a particular case which vary from case to case.

1.1 Research Background
The dividends by the corporate companies are declared at the discretion of the board of directors of the company. The dividend policies of the companies depend upon several factors which include consistency in making profits, the avenues for reinvestment of the profits in the business, the potential for growth, the marginal efficiency of the capital, and the majority shareholders’ influence on making dividend decisions due to tax or other implications. The dividend policies of the companies or the changes in the dividend policy will affect the different classes of investors differently based on the individuals’ income levels, age profile, risk-taking ability, and tax implications.

Therefore, the collective individual decisions will affect the movement of the share prices of the company. The increase in dividends is usually welcome by the market and the markets react negatively to the reduction in the dividends. This paper consists of three objectives to research the Dividend Policy, the signaling effect of change in the dividend policy of a company on the stock market, the relationship between dividends and signaling, and its effect on the investors and the share prices. The study involves the analysis of data from secondary sources and collecting data from investors in order to analyze the effect of information on investors and the share prices before and after the dividend announcement. There are several factors at interplay in determining the prices of shares in the stock markets.

The earning capability of the company is the primary factor in determining the share prices. Since the dividends are declared out of the earnings, it is generally believed by the investors that it is an important indicator of the company’s performance. This general belief of the investors is used by the companies to project the future of the company in a manner suitable to serve its purpose or use to make strategies, by giving signals to the public as to the future prospects of the company through dividend announcements. Therefore, a comprehensive analysis with reference to the dividends should cover its relationship to the earnings per share (EPS), price-to-earnings (P/E) ratio, dividend yield to the investor, the company’s leverage position, and the company’s dividend history.

The other factors include the economic environment, the growth phase of the industry, and the management structure or the type of management that could influence the dividend policy of the company. For example, the dividend yield of the companies belonging to different types of industries will vary due to so many factors which determine the profitability and the growth of the industry. It could be observed from the following chart that the dividend yield of the REIT (Real Estate Investment Trust) Index has been consistently superior compared to the HSI from 2009 to 2012. ...Download file to see next pages Read More