Understanding Empirical Research in Corporate Finance - Essay Example

Understanding empirical research in corporate finance Contents Introduction 3 Discussion 3 Conclusion 8 Reference 9 Introduction The topic that has been selected for discussion is does dividend reduces the profit of the company. Dividend can be explained or defined as the distribution of the retained earnings of the company to its shareholders. The dividend is created or generated through carrying out various profit making activities. Therefore it can be derived that dividend is not always regarded as an expense and it always does not reduces the profit of the company. Dividend has no impact or influence on the profit of the company and therefore it is not included in the income statement but it is mentioned in the liability side of the balance sheet of the company at the time of declaration of dividend by the board of directors of the company. When the dividend is already being paid by the company it only influences the balance sheet of the company where the amount that is mentioned in the retained earnings is reduced or decreased by taking into assumption that the dividend of the company has already been paid in terms of cash. The only aspect through which dividend can be regarded as an element that reduces the profit of the company is when the company takes the future profit into consideration when the company is forced to pay large dividend for fulfilling various requirement for the future growth and development of the company. Dividends are mostly paid out by the large firms those who are not supposed to reinvest a large amount of their generated cash flow into their business or operations. Discussion According to the Farzad Khorsandi the author of the journal of contemporary research in business is that the dividend policy is considered as an important and vital aspect in the field of financial management and also in case of the substantial outflow and cash profit of the company. The companies mainly choose or select different ways or methods for the payment of dividend which mainly includes the cash dividends, split of shares, share of profit, reverse split of stocks, dividend out of the assets, and redemption of shares. The author describes that when the dividend is being declared by the respective board of directors of the company its impact on accounting of the company is that it affects the reduction or decrease in the balance of the retained earnings and increases the liability and the account payable of the company and therefore reduces or decreases the cash balance of the company. The retained earnings of the company is the earning that is accumulated by the company over a period of time and which remains undistributed by the company and this undistributed amount is considered as the retained earning which is reinvested in the company by the shareholders of the company. The payment of dividend can be done on quarterly, annual and semi-annual basis. When the dividend is declared by the company it affects the retained earnings and the equity account of the company as these reduces or decreases but does not decreases if the dividend is paid The journal or the research paper deals with the question that whether the dividend that is declared or paid by the company will increase the profit of the company in future and for supporting the question with the reasonable justification that the selection and the decision of dividend policy of the firm is considered as an important and significant decision of the firm. Dividend has an important and vital aspect in the future performance of the company. The approach or the theorem of Modigliani and miller describes or explains that the extent or the level of dividend does not influence or impacts the value of the firm and justifying that the company’s generally maximizes or increases the profit of the company by increasing and enhancing the value of the company through investment. According to the approach of Modigliani and miller dividend is considered as an irreverent element for determining the value of the firm (Khorsandi, 2013).Dividends can be regarded and considered as the return that is provided or distributed to the investors who faces or encounters the risk when it undertakes investment in the company. Dividend is an important element as it deals with providing reward to the existing shareholders of the company. Dividend is considered as a signal or indication of the position of the company as it provides relevant and important information to the shareholders as well as the investors of the company. The information that is provided to the shareholders reveals the strategies that are adopted by the company in its short and long run operation. The managers who are provided with the information determine the future earnings and profitability of the company through the use of dividend. This activity is costly therefore the smaller firms avoid this method and also the payment of dividend. This method increases the price of the dividend and also increases the payout of dividend. The agency theory of the dividend explains that the method mainly deals with decreasing the agency cost of the company and increasing the value of the firm as well as increasing the future profit of the company. The indication that is provided by dividend of the company about the future strategies that are adopted by the company is useful and significant if the investor of the company is capable or is being able to understand the indication which will facilitate the company in maximizing its profit. The dividend payout is also considered as important element to the shareholders and the investors of the company which will assist and help them in making decision regarding their investment policies or strategies. The author reflects that when dividend is being declared and paid by the company it does not reduces the profit of the current and present accounting period included in the income statement and dividend is not considered as an expense of the company (Jiraporn, Kim and Kim, 2011).Dividend will decrease the retained earnings of the company. When the company uses or utilizes its cash very profitably and if the company uses the profit for the payment of dividend instead of reinvesting the dividend of the company in profitable venture or projects the company will realize less future profit. The author Timothy Mahalang in his journal has emphasized on the various theories that explains the relevance and the irrelevance of the dividend policy of the company. To emphasize on the importance of dividend he has explained that the dividends are the corporate earnings of the company and it is being transferred to its shareholders. There are several reasons why a company may prefer in converting some of its earnings as dividend (Mahalang, 2013). The company that is undergoing growth and development in its operation would not prefer in the; payment of dividend because the company will prefer in investing the amount for the future growth and development of the company and the firm. The firm or the company which is in the stage of maturity prefers in increasing its value in order to improve its performance by reinvesting its earnings and not paying of its earnings as dividends (Lie, 2005).The companies that do not prefer to pay off its dividend out of its earnings. The author in his journal reflects on the fact that enhancing the wealth of the shareholders and the process of making profit of the company is considered as an important objective or the aim of the company. The dividend policy influences and affects the value of the firm and which as a result increases and enhances the wealth of the shareholders. The dividend policy is recognized as an important and vital financial decision that is encountered by the corporate managers. The dividend policy affects and influences the share prices of the company which increases the return that is provided to the investors of the company, financing that is required for the internal growth and development of the company or the firm and maintain the equity base of the company through the help of retention along with the leverage and gearing (Farsio, Geary and Moser, 2004). The author in his journal has asked the question that whether the dividend payout of the company and the performance of the company are related and dependent on each other and in order to justify and finding an reasonable answer to the question the author reflects and focuses on the fact that dividends results in increasing performance of the company which will enhance the performance of the company in the future. The author establishes a positive relationship between the dividend and the expected future earnings of the company and highlights and emphasizes on the fact that increase in the dividend increases the profitability of the company or the firm and the decrease in the dividend are not associated with the future profitability of the company. There is the presence of positive relationship between the dividend payout of the firm and the profitability of the company (Stulz, 2000). The dividend increases the profitability and the performance of the company as the profitability of the company is measured or determined on the basis of the return on asset of the company. Dividend establishes the relationship between the return on equity, return on assets and growth policy with the dividend policy of the company or the firm. The company that increases the dividend payout has more financial flexibility and decreases the volatility of the income. It is not possible on the part of the financial managers of the company to change or modify the value of the firm by altering the dividend policy of the firm. The observation and the market position of the firm reveal that the dividend policy of the firm or the company is mainly evaluated and valued by the market. The valuation of the firm mainly emphasizes and focuses on the relationship that is established or developed between the future cash flow of the company and the dividends and earnings that is generated by the company or the firm in future (Zhou and Ruland, 2006).The dividend policy of the firm or the company provides an in-depth understanding of the cash flow of the company that is considered more reliable and appropriate as compared to the estimation of the value of the firm or the company. The dividend policy of the firm or the company take into consideration and deals with various circumstances of the shareholders of the company and which in turn enhances and increases the value of the shareholders of the company. The firm has the ability to formulate a dividend policy that will fulfil the need and requirement of the shareholders of the company or the firm (Arnott and Asness, 2003). Conclusion The author of the first journal that whether the dividend will increase the profitability in the future emphasizes and concludes that the dividend policy cannot only be regarded as an important and vital tool for describing the role of the investors in decision making process of the company and the company cannot use or apply the historical data or the dividend policy in order to predict the future price and performance of the company or the firm. It is observed that the managers of the business unit of the firm or the company can make or undertake the process of decision making about the dividend policy inspire of considering the influence of the decisions in the market value of the company. But the dividend policy maximizes the value of its shareholders which in turn can increase the future profit of the company. The second journal can be concluded that the dividend payout of the firm or the company affects or influences the performance of the firm or the company and there is a strong and positive relationship between the dividend payout and the profitability of the firm or the company. The dividend policy is considered and regarded as an important and relevant in the process of decision making in the company or the firm and which in turn influences and affects the performance and profitability of the company. The author has concluded that revenue and the total asset of the firm also affects the performance and profitability of the firm or the company. Reference Arnott, D.R. and Asness, S.C., 2003. Surprise higher dividends is higher earnings growth. Financial Analyst Journal, 1(1), pp: 70 – 87. Farsio, F., Geary, A., and Moser, J., 2004. The relationship between dividends and earnings. Journal for Economic Educators, 4(4), pp: 1 – 5. Jiraporn, P., Kim, J. and Kim, S.Y., 2011. Dividend payouts and corporate governance quality: an empirical investigation. The Financial Review, 46(1), pp: 251 – 279. Khorsandi, Farzad., 2013. Review the role of dividend policy in determine stock market value. Interdisciplinary journal of contemporary research in business, 5(1), pp: 1008-1010. Lie, E., 2005. Financial flexibility, performance, and the corporate payout choice. The Journal of Business, 78(6), pp: 2179 – 2202. Mahalang, T., 2013. The relationship between dividend payout and firm performance. European scientific journal, 8(9), pp: 199-205. Stulz, R.M., 2000. Merton Miller and modern finance. Financial Management, 29(4), pp: 119–131. Zhou, P. and Ruland, W., 2006. Dividend payout and future earnings growth. Financial Analysts Journal, 62(3), pp: 58 – 69. Read More