Impact of Level of Debt and Dividend Policy on the Value of a Firm - Coursework Example

Student Name: Tutor: Title: Impact of level of debt and dividend policy on the value of a firm Course: Institution: Impact of level of debt and dividend policy on the value of a firm Table of Contents Table of Contents 2 Introduction and problem definition 3 Implication debt level and dividend policy 3 Irrelevance perspective by Miller and Modigliani Approach 5 Dividend policy impact on shareholder’s value 6 Tax considerations 10 Tax implications on United States firms 11 Stock repurchases 11 Agency and dividend policy 12 Asymmetrical information and dividend policy 14 Financial Gearing 15 Tradeoff theory 16 Expectations theory 16 Lintner Model and Pecking order hypothesis 17 Dividend policy 17 A company operating in, and floated where stock exchange is under-developed 20 Conclusion 22 Bibliography 23 Introduction and problem definition The level of debt and dividend policy which affect the financial gearing influences greatly the value of a firm. This financial aspect of a company floated in country with a stock exchange that is undervalued provides a deeper understanding of debt and dividend policy in regard to the value of a firm. Capital structure consist of both debt and equity capital. The apt combination of equity and debt capital brings about the required standards that are needed for financing, operating and investing activities within the business organization. The combination of debt and equity gives investors, governments, and lenders a quick glance of the financial strength of the firm and whether the firm is in a position to meet its financial objectives. Shareholders value is what is delivered to shareholders due to the ability of management to grow share price, dividends, and earnings (Feldstein & Green, 2002, p.33-9). The shareholders value in the summary of all strategic decisions that has an impact on the ability of the firm to increase efficiently the amount of cash flow in the firm over a period of time. This paper examines the implications of dividends policy and debt level on the value of a firm through analyzing different theories and concepts. The effects dividend policy and debt level to a firm operating in a country where stock exchange is underdeveloped has been highlighted. Implication debt level and dividend policy It has been established that various research studies that dividend policy can make significant effect on corporate future value when implemented and followed carefully. The objective of wealth maximization is prevalently accepted objective of business since it reconciles the various and usually conflicting stakeholders’ interest. The fascination of shareholders value is gaining popularity due to several advancements that include: The corporate takeover threat by those looking for undermanaged and undervalued assets. Impressive endorsement through corporate leaders who use the approach The escalating acknowledgement that traditional accounting parameters such as ROI and EPS do not have reliable link the value of shares of the firm. An escalating acknowledgement that long-term compensation needs to be tightly close to returns to shareholders. Reporting of shareholders’ returns together with other performance measures in business press. Debt forms an important combination of the capital structure of the firm that makes it realize the objective of funding financing activities. Debt has the following features: Commitment of making fixed payment in the future. The fixed payment are applicable to tax deduction Inability to make the payment can lead to default or losing control of the company to the lenders. Consequently debt should include the interest bearing debt both short term and long term, the PV of operation of lease commitments (Chew & Donald, 2001, p.131). Debt level in the company is used by investors to gauge the financial strength of through its ability to clear outstanding debts. When the level of debt is too high, investors are skeptical about the future of such a firm since in ability of the company to pay debt can lead to it being taken over by the lenders or its property being auctioned to clear the debt. Irrelevance perspective by Miller and Modigliani Approach Franco Modigliani and Merton Miller (M&M) demonstrated that provided certain simplifying assumptions, the dividend policy of a firm have no impact on its value. The fundamental gist of their perspective is that the value of a firm is a result of a choice of optimal investments. The resulting net payout is the difference between investments and earnings which is normally a residual. Since the net payout is made up of share purchases and dividends, a firm has the ability of adjusting its dividends to any degree with an offsetting adjustment in share outstanding. From the side of investors, dividend policy is demonstrated to be irrelevant since any stream of payment that is desired can be obtained by appropriate sales and purchases of equity (Miller & Rock, 1985, p.411-433). Consequently investors are not indebted to pay a premium on any form of dividend policy. In conclusion M&M noted that provided with firm’s investment policy, the choice of the firm of dividend policy has no effect on the wealth of shareholders. The proposition is outlined in the following assumptions: No taxes distortion exist Information is equally available to everyone and is costless Transportation and flotation costs are non-existent Non agency or contracting costs exists Dividend policy impact on shareholder’s value The fundamental goal of financial management is profit maximization of the wealth of shareholders. In order to realize this function, the management, who are custodians of interest of shareholders are encounter three vital categories of decision making which include financing, dividend decisions, and investing. Investment decisions are responsible for determination of the types and value of assets employed by a firm. Financial decisions are responsible for deciding the capital structure of the firm and act as a foundation of making investment decisions. Dividend policy is concerned with payout policy determination that is followed by the management in determination of the pattern and size of cash distributions to shareholders of the company. Dividend decisions, investment, and financing are interdependent and have to be solved at the same time. A correct combination of the policies will result in maximization of shareholders wealth (Fama & French, 2001, p.3-43). Finance borrowing by the firm to facilitate its operations results into debt. The levels of debt and dividend policy greatly influence the level of financial gearing which impact on the value of a firm. Shareholders are concerned with the value of the share which consists of the selling price plus any other dividend payable to the owner of the share. Consequently share price is a main determinant of the value of a firm. The wealth of shareholders is represented in the market price of the common stock of the company which is a function of the company’s dividend, financing, and investment decision. Higher dividend increases the market value of share and vice versa. Shareholders normally prefer current dividend to any anticipated future income. Dividend is therefore taken to be a vital factor in determination of the wealth of shareholders. This true for individuals who are salaried, retired pensioners and other people who have incomes that are limited (Brealey, Myers, Allen, 2006, p.42-9). Dividend possesses information content and dividends payment show that a company has a good chance of earning. The shareholders’ wealth is to a large extent influenced by five parameters which include profit margin improvement, growth in sales, capital structure decisions, capital investment decisions, and cost of capital (interest on debt, dividend on equity). For Companies that pay dividend there is existence of substantial impact of dividend policy on the wealth of shareholders in organic chemical companies. In inorganic companies, the wealth of the shareholders is not in any way influenced by the payout of dividend. Risk in the model of valuation of shares points out the opportunity cost to investors for not investing in other opportunities that are similar. Risk is determined in the form of returns that an investor can get on other financial assets that possess similar risks. This risk is composed of market risk which entails macroeconomic variables like inflation, currency exchange and interest rate changes (Baker, 1999, p. 7-13). Risks are unique to a firm in regard to competitive position, size, programs of research and development. A model of valuation that takes into account the firm’s market risk is known as capital asset pricing mode (CAPM). A statistic called beta is used to measure how stock price of a company changes in relation to the entire market. In an effort to minimize risk, investors normally lower risk shares with high risk shares in the diversified. Fundamental and technical analyses are used by investors in determining the required rate of return. Technical analysis looks at the past record of price of shares and studies the underlying cycles in order to provide information. Fundamental analysis looks at the company and its sector or industry in order to get information concerning profitability that could provide information on the share’s value. Return on equity, earning per share (EPS), and price to earning ratio are comparables are prevalently applied. Capital valuation determines the worthiness of a firm in regard to debt capital and equity capital. Most companies will not advance successfully without the use of debt capital. The stock exchange market is used to trade shares of the firm that are responsible for generation of profits (Pyung & Starks, 1995, p.995-1011 In a country where the stock exchange is under-developed, there is a new challenge as companies try to raise capital to finance their operations as well as pay dividends. This impact will be discussed in the last part of this paper. The shareholders value approach determines the economic value of a particular investment through the discounting the cash flows that has been forecasted by the capital cost. On the other hand, the cash flows act as a foundation for returns of shareholders from share price and dividend appreciation. A going concern has to increase its ability of generating cash. The capacity of the company of distributing cash to its various constituencies is determined by its capacity to realize cash from business operations and its position of obtaining additional funds required from sources outside the business (Bajaj & Vijh, 1990, p.193-9). Equity and debt financing are two important external sources. The power to borrow and shares’ market value both are dependent on the ability of the company to generate cash. The market value of share has tremendous impact on equity financing. For a given level of funds needed, the higher the price of share, the less the dilution will be carried by prevailing shareholders. The financial power by the management to deal efficiently with corporate claimants also results from escalating the value of shares. Value of share increase can be occasioned through rewarding shareholders with returns from capital gains and dividends. There is a unique relationship that exists between corporate value and dividend policy is summarized in a famous statement which states that “provided the investment policy of the firm, the dividend payout policy chosen to be followed will neither affect the total return to shareholders nor the current price of its shares. Nevertheless, market imperfections like information asymmetries between outsiders and insiders, differential tax rates, conflict of interest between shareholders and managers, floatation costs, transaction costs, and irrational behavior of investor might translate dividend decision to be relevant (Chew & Donald, 2001, p.131). The dividend policy relevance to corporate value is occasioned by imperfections in the market. Shareholders can get return on their investment either in the form of capital gains or in the form of dividends. Dividends make up an immediate cash payment without occasioning any sale of shares. On the other hand, capital losses or gains are explained as the difference between the buy and sell share prices. Frictions costs make up one of the market imperfections and are further differentiated into floatation costs, transaction costs, and taxes. Another imperfection in the market is occasioned by information asymmetries between outsiders (investors) and insiders (managers) (Feldstein & Green, 2002, p.33-9). The third market imperfection comes from the agency conflicts in regard to different objectives of the stakeholders of the firm. There other aspect relating to dividend policy which cannot be grouped in the mentioned imperfections. Tax considerations Tax considerations have clear implications on dividend payment to shareholders of common stock. This is because dividends bring about tax obligations which might be in other circumstances be avoided or deferred. Tax considerations influence the selection of dividend payout used by foreign affiliates. It is possible to determine the effects of tax considerations through comparing the foreign affiliate’s behavior subject to different rates of foreign taxes and those having different forms of organization that come up with differing tax incentives for remittance of dividend (Fama & French, 2001, p.3-43). Evidence show that companies follow dividend payout policies which are designed partly for minimization of tax obligations. Nevertheless, just like dividend payout between shareholders and firms, minimization of tax cannot give an explanation for the prevalently observed dividend policies within firms. Tax implications on United States firms The tax consequences due to paying dividends outside the firm have a direct impact on a multinational firm. Corporations in America owe taxes to the United States on their incomes in foreign land but they are entitled to deferment of US Tax liabilities on the portions of profits that are un-repatriated of incorporated foreign affiliates. The US further offers permission for claiming of credits against US taxes for all foreign income taxes which has been paid on income remitted in the form of dividend. Remittances of dividend from foreign subsidiaries to their American parents’ occasion US tax liabilities which are normally functions of differences between US corporate tax rate and foreign tax rates (Brealey, Myers, Allen, 2006, p.42-9). Companies owe U.S taxes in regard to the difference that exist between the applicable rate of tax that is foreign and the United States rate of tax; then the repatriation tax that is effective is equal to the difference among the two. It is advisable to pay less or no dividend if the corporate rate is lower than the individual rate. High dividends have to be paid when the individual rate is less than the corporate rate. Stock repurchases A stock repurchase significantly increase the debt-equity ratio towards debt that is high and consequently repurchase is seen as a financing decision. A firm buys its own stock at prices that are depressed and considers this as an investment decision. This not a clear opportunity for investment since the firm can end up consuming itself. The procedure for a stock repurchase commences with a public announcement giving the details of the amount, procedure, and purpose and the entire procedure of the stock purchase. Open market purchase involves offering stock at the prevailing market price (Baker, 1999, p. 7-13). Tender offer is more formal and has a specified price. The last type is known as negotiated basis where repurchasing is done from a specified large shareholder. Stock repurchases have importance to the organization. They offer an opportunity for investment that is internal. Repurchases also assist in the modification of the capital structure of the firm. Repurchases have an impact on earnings per share and consequently increasing the firm’s stock price. Therefore, repurchases can serve as an important avenue that a firm can bring flexibility within its setting. Agency and dividend policy The degree of dividend payments is partly determined by the preferences of shareholders as duly implemented by management representatives. The impact of dividend payment is affected by a variety of claim holders such as managers, debt holders, and suppliers. Agency relationship exists between 1. Debt holders versus shareholders conflict 2. Management versus shareholders conflict Shareholders are the major dividends’ receipt and prefer huge dividend payments, Ceteris Paribas; on the other hand, creditors will want restriction on payment of dividend to maximization of the resources of the firm which is available for repayment of claims. In terms of manager and shareholders relationship, other circumstances remaining the same, managers have their remuneration tied to firm size and profitability and therefore are interested in low dividend payout levels. A dividend payout that is low maximizes the assets size in management control, maximizes flexibility of management in the choice of investment, and oversees reduction in the desire to resort to capital markets for financing investment (Miller & Rock, 1985, p.411-433). Consequently Shareholders desiring efficiency in management of finance investment prefer leaving little discretionary cash in the hands of management and to compel managers to turn to capital markets for funding investment. These kinds of markets offer monitoring services that ensure managers are disciplined. Shareholders have the ability to use dividend policy in encouraging managers to look after the best interest of the owner. Payouts that are high offer increased monitoring through managerial discipline that is increased and capital markets. Legal environment offers strong protection to shareholders to enforce disgorging of cash by companies (Fama & French, 2001, p.3-43). The resultant impact is that UK shareholders’ monitoring that is effective and have strong legal protection and consequently associated with dividend payment that is high. Empirical evidence from UK studies shows that negative relationship between dividends and ownership. Evidence in respect to financial institutions is not only contradictory but also limited. Financial institutions post a positive relationship between shareholders and dividends as seen by some authors. Asymmetrical information and dividend policy In markets that are symmetrical, all stakeholders have similar information concerning the firm. If one group of people has in its possession more information about the current situation of the firm and future prospects, a situation of informational asymmetry is realized. Most financial practitioners and academics believe that managers have in their possession superior information on the firm as compared to other groups of people. Changes in dividend, IPOs, and dividend payment elimination are regularly announced in financial media. Following these announcements, the prices of share usually increase in respect to dividend initiations and dividend increases (Pyung & Starks, 1995, p.995-1011). On the other hand, price decline with respect to dividend elimination and dividend cuts. The perspective that dividend payout show the prospective of a company is well accepted among chief financial officers in United States corporations. Signaling has been ranked by many respondents as the main explanation for dividend payout. Information concerning the prospects of a firm may comprise of the current projects of a firm and available investment opportunities in future. The dividend policy of a company exclusively or partly in combination with other indicators such as trading by insiders or announcements of capital expenditure, may pass on the message or information to a market that is less informed. Empirical evidence has demonstrated that increase in dividend is followed by significant increase in price (Chew & Donald, 2001, p.131). Likewise decrease in dividend has occasioned significant drops in price of share. There have been mixed results from Singapore, Japan, and US markets. Dividends carry encoded information to the market. Predictions concerning future earnings of a firm as a result of information on dividend should be superior to other forecasts that have been arrived at without using information concerning dividend. Financial Gearing The term gearing is mostly used when describing the level of net debt of a company as compared with its equity capital. This is usually represented as a percentage. When a company possesses gearing sixty five percent, it has debt levels that sixty five percent of its equity capital. Gearing ratio indicates how a company is encumbered with debt. Gearing ratio varies from one industry to another. A gearing ratio of 10% can be regarded as prudent whereas an over a hundred percent would be too risky for the company regardless of the industry (Brealey, Myers, Allen, 2006, p.42-9). Gearing has also been applied to refer to borrowing through an investment trust that boost the income and return to capital through additional investment. In some circumstances, gearing can be used to describe the ratio between the share price of the company and its warrant price. Financial gearing is used to describe the relationship that exists between the equity shareholders funds and the company debt. Financial gearing is a relevant predictor of risk or success of the company. High financial gearing shows a large portion of debt to equity ratio within the capital structure of the company (Baker, 1999, p. 7-13). The proportion is lower where the debt is small. When the company has a large amount of debt, this may not be healthy financially to its future operations. The problem arises when the company fails to pay its future debts. Investors shy away from investing in such types of companies. Financial gearing represents a vital figure which cannot it superficially understood. Tradeoff theory The tradeoff theory explains that firms have to set their leverage to the degree at which firm value has to be maximized. At this juncture, the tax savings that come from increasing leverage are perfectly offset by the enhanced probability of catering the costs of financial distress. The tradeoff theory explains why firms select debt levels which are too low to exploit fully the interest tax shield owing to financial distress costs. The theory assists in explaining the differences in the application of leverage across different industries owing to differences in the level of distress costs and cash flows volatility. Expectations theory When the time nears for management to make an announcement on the amount concerning next dividend, investors harbor expectations concerning the amount of dividend to be declared. The investor will then compare the amount of dividend announced and what they had expected. When the amount of dividend is what is expected, even if it shows an increase from years before, the market price of the stock will remain the same (Bajaj & Vijh, 1990, p.193-9). On the other hand, if the dividend is lower or higher than what was expected, the investors will re-evaluate their perceptions concerning the firm and the stock value. Lintner Model and Pecking order hypothesis Lintner Model is a model that describes dividend policy as having two parameters which include the rate at which dividends adjust to the target and the target ratio of payout. This paper discusses the impact of dividend policy and the level of debt on the value of firm and narrows down on a scenario where a company is floated where the stock exchange is undervalued (Damodaran, 2001, p.67). Pecking order hypothesis explains that a firm which resort to retention of profits for capital expenditure financing from internal sources distributes dividends which are less than a firm which uses external sources for financing its investment expenditure. Consequently there is a negative relationship existing between dividend payout and CAPEX. Dividend policy Dividend policy can be categorized as residual and managed. In the case of residual dividend policy the amount of dividend is normally the cash left after the firm makes desirable investment with the application of the NPV model. Consequently, the dividend amount is normally highly variable and sometimes it is zero. If the management has the belief that dividend policy is vital to their investors, and it influences positively valuation of share price, then they will apply managed dividend. The dividend policy that is optimal is one that that focuses of maximization of stock price of the company’s stock, which eventually leads to shareholders’ wealth maximization. The firm looks for ways of giving back to the shareholders and dividend is one of those means. Firms chose adopt dividend policies basing on the stage of life cycle that are in (Pyung & Starks, 1995, p.995-1011). Changes in earnings are the most vital determinants of subsequent changes in dividends. Dividend policy is the one that is set first followed by investment and then financing decisions. Dividend is taken as given. Firms having many investment projects that are valuable are likely to cause a low target payout ratio as compared to those with high target. The wealth of shareholders is carried in the market price of the common stock of the company which is normally a function of the company’s dividend, financing, and investing decisions. Decisions concerning dividend are the most crucial when it comes to efficient performance and organizational objective attainment. Dividend decisions are crucial because of their significant role on the overall growth strategy of the company in regard to finances. The finance manager has the crucial role of determining the optimal dividend policy that will increase the value of the firm. Reductions in dividend payment have been observed to occasion a similar reduction in the share prices of a firm. Declaration of increase in dividend brings about security returns that are positive. Subsequently, declaration of dividend decreases occasions security returns that are negative (Baker, 1999, p. 7-13). Share prices plummeting happen because dividends possess a signaling effect. The signaling effect indicate that managers have superior and private information concerning the future prospects and end up choosing a dividend level that represent that private information. This perspective in regard the position of the firm may lead to a dividend payout ratio that is stable. Dividend policy of a firm carries implication for managers, lenders, investors, and other stakeholders. To the investors, dividend, regardless of it being accumulated or declared, is a means of income and is also used in the valuation of a firm. The flexibility of managers of investing in projects depends on the amount of dividend that can be offered to shareholders since higher dividend reduces the amount available for investment (Damodaran, 2001, p.67). Lenders are keen to know the declared amount of dividend since high amounts of dividend will mean there would be less money for servicing and redemption of their claim. Dividend payments depicts an illustration of classic agency situation since is effects are felt by numerous claim holders. Significantly dividend policy can be applied as a mechanism of reduction of agency costs. Dividends payment leads to reduction of discretionary funds which managers have investment opportunities and perquisite consumption and compel managers to look for financing in capital markets. The monitoring by external capital markets make managers to behave in a disciplined manner and act in the best interest of the owners. Companies opt for a dividend payout ratio that is stable since this is the interest of shareholders and they look forward to it. Shareholders may prefer a dividend payout ratio that is stable for their own varying reasons. Shareholders who are risk averse would want to invest in firms which pay current returns on shares which is high. Other small savers and pensioners belong to a class of shareholders who are fully or partly dependant on the dividend for their daily upkeep (Frankfurter & Wood, 2002, p.111-122). Charity firms and institutions of education would like stable dividend since without that they will be crippled in meeting their daily operations. Such kinds of investors will always prefer companies that pay dividend on regular basis annually. The grouping of stakeholders in firms with their matching effect of dividend policy is what is referred to as clientele effect. Investors apply dividend policy as a surrogate for information which is not usually easily accessible. The dividend policy can be used in assessing the long term earnings prospects. Many of the investors use dividend in satisfaction of personal income needs. When dividend fluctuate from year to year investors are forced to sell or buy stock for the satisfaction of the prevailing needs and hence incurring expensive transactions that are expensive. Legal listings show that certain some types of financial institutions may only invest in firms that have a dividend policy that is constant (Pyung & Starks, 1995, p.995-1011). As the investment opportunities of a firm increase, the ratio of dividend payout will increase. The dividend policy of the firm is crucial although in many cases appearances may not be the true picture on the ground. The main issue may be the expected earning power of the firm and the risk accompanying earning. A company operating in, and floated where stock exchange is under-developed It has been noted that dividend policy and debt have serious signaling effects that decides the future of any company that has its stock being traded in the stock market. The agency problem has indicated that every stakeholder has his own interest in regard to distribution of the firm’s capital. Dividend policy has an impact on the welfare of owners, managers, lenders, shareholders and other people who have claim in the business. Shareholders require the capital market to impart discipline among the managers so that can work with the interest of the owners at heart. The lenders look at the price of the share price to decide whether the company is in a position of paying up its debt. The remuneration of managers is tied on the profits, tax implication and dividend policy of the firm (Brealey, Myers, Allen, 2006, p.42-9). It is only companies that floated their shares in the capital market that will give all stakeholders an opportunity to study its performance and decide whether the company is on the right track or not. Dividend policy decides the fate of the company as far as shareholders are considered. When dividends are increased the share price of the firm tends to increase and vice versa. Declaration of dividends decides the level of confidence that the shareholders have in the company and its management. The needs of various shareholders decide the preferred distribution of earnings. Consequently in a country where the stock exchange and therefore, the capital market is underdeveloped, a company is likely to be negatively affected since investors have nothing to use as a measure for the performance of the company. Investors look at the trading of shares on the stock exchange to decide whether the company is worth investing in. a stock exchange that is under developed will not even give an opportunity to lenders to speculate about the future prospects of the company (Damodaran, 2001, p.67). Various stakeholders use earnings distributions to make crucial decisions about the company. Floating shares in country where stock exchange is underdeveloped may not give the company a chance of getting additional capital when it is in need. The stock exchange is important to both insiders and outsiders in regard to stakeholders since it has an implication on the performance of the company. Conclusion Companies make use of debt capital in their quest to expand their operations and fund investing financing activities. Equity capital has to be combined with debt capital for the company to be able to meet its financial obligations. The level of debt in any firm shows the shrewdness of the managers towards financial management. High levels of debt are not healthy for any firm since it assigns the control of the firm to the lenders. Shareholders and prospective shareholders look at the trading of the company in the stock exchange markets and its dividend policy to decide whether to continue holding shares of the company or sell them out. A country where the stock exchange is underdeveloped denies many stakeholders a chance of making crucial investing decisions about the firm. Many investors use the trading of companies share in the stock exchange to decide whether to invest or not. Floating shares in a country where stock exchange is underdeveloped will mean that very few people will be willing to invest in that company. Dividends policy is important to shareholders and other potential investors since it indicates or gives a rough speculation concerning the general performance of the company. Bibliography Bajaj, M. & Vijh, M.A., 1990, Dividend clienteles and information content of dividend changes, Journal of Financial Economics, 26: 193-219. Baker, HK, 1999, Dividend Policy issues in regulated and unregulated firms: a managerial perspective, Managerial Finance, 25 (6): 1-19. Brealey, R A., Myers, SC., Allen, F., 2006, Corporate Finance. International Edition - 8th ed., McGraw Hill/Irwin. Chew, Jr. & Donald H., 2001, The New Corporate Finance: Where Theory Meets Practice, International Edition, McGraw-Hill Irwin, Singapore. Damodaran A., 2001, Corporate Finance: Theory and Practice, 2nd edition, John Wiley & Sons, New York. Fama, E.F. & French, K.R., 2001, Disappearing Dividends: Changing Firm Characteristics or Lower propensity to pay, Journal of Financial Economics 60: 3–43. Feldstein, M. & Green, J., 2002, Why do companies pay dividends? American Economic Review, 73:7-38. Frankfurter, G.M & Wood, BG., 2002, Dividend policy theories and their empirical tests. International Review of Financial Analysis, 11 (2): 111-138. Miller, M. & Rock, K., 1985, Dividend policy, Growth and Valuation of Shares, Journal of Business, 34: 411-433. Pyung, S.Y. & Starks, L.T., 1995, Cash flow signaling Hypothesis versus Free Cash Flow Hypothesis: The case of Dividend Change Announcements, Review of Financial studies 8: 995-1018. Read More