Corporate finance 2 - Essay Example

Last but not the least the third group lauds large dividends as positive signal to shareholders that all is well. So where does the modern shareholder satisfaction stand in relation to dividend policies? Another query which relates to this discussion is how signaling models attempt to explain the proportion of equity retained by an entrepreneur, the type of financing used for an investment and the amount of equity issued or repurchased. The issue then pertains to information asymmetry (availability of information).

Firstly if we look at Dividend policy it was well put by Black 1976 (cited by Frankfurter 2002), “That the nearly universal policy of paying substantial dividends is the primary puzzle in the economics of corporate finance.” Thus the proposition leads us to the query whether shareholders should be paid sufficient dividends whether or not they are making sizeable profits on the stock market. Over the last half century academics have spoken in great depth over this issue and suggested conflicting theoretical frameworks to explain their point of view.

(Frankfurter 2002).The problem is that these assertions often lack empirical depth to the criticism and stumble upon self contradictions in an attempt to explain corporate dividend behaviour.(Frankfurter 2002).Today academic opinion is divided as to whether dividends are attractive to shareholders and will have a positive impact in stock prices.(Frankfurter 2002 )Another school of thought contends that prices are negatively correlated with dividend payout levels.(Frankfurter 2002).The third view is that firm dividend policy is irrelevant in stock price valuation.

(Frankfurter 2002).My paper will discuss and try to reconcile all these views towards a better theory and understanding of this issue.These views are best summed up as being based upon,the tax effect ( Litzenberger and Ramaswamy