Dividend Policy: Its impact on firm value, and shareholder wealth?

According to Arnold (2008), who defined dividend policy is the determination of the proportion of profits paid out to shareholders-usually periodically. The issue to be addressed is whether shareholder wealth can be enhanced by altering the pattern of dividends not the size of dividends overall. Holder, et al (1998) illustrates that some researcher believed that dividends increase shareholder wealth, but others suggested that dividends decrease shareholder wealth. In general, those are influence of these stakeholders wealth by dividend policy.

However, different clientele have different views on present cash dividends and future capital gains. Therefore, that different investors will choose the suitable dividend policies for their needs, if a company has changed its dividend policy, that no longer suitable for the needs of existing shareholders, as this result, that may lead to shareholders sell those shares which is decrease share value and market value of the company. Bhattacharya (1961) explains that a firm's dividend policy on the current price of its shares is a matter of considerable importance.

There is a example reported by Shotter (2012), the Fenner plc pre-tax profits rose faster, jumping from £26.6m to £41.7m in 2011, both dividends per share and earnings per share excluding extraordinary items growth increased 11.11% and 67.81%, respectively. Nicholas Hobson who is the chief executive of the Company, he believed that company continue to see industrialisation and economic growth in South East Asia, there will be strong demand for raw materials, the industrial conveyor belt maker is “confident” of its prospects. Therefore the company will continue to increase investment (Shotter, 2012). In addition, Fenner has an interim dividend of 3.5p per share, up 32 per cent from the payout last year, and payable from diluted earnings per share of 14.7p. The company also believed that dividend increase was a reflection of its confidence in its prospects and that the board intended to maintain a progressive dividend policy in future (Shotter, 2012).

In general, if the company face number of the investment opportunities, it will the increase demand for funds, that it is likely to consider less cash dividend and will be consider the profits for reinvestment. On the contrary, if the company is the lack of investment opportunities, the decrease demand for funds, the company has multiple cash dividends. Therefore, in determining its dividend policy, which is regards to its future development trends and investment opportunities to make a good analysis and judgment, that to serve as the basis for the development of the dividend policy. In addition, the company should maintain a reasonable capital structure and cost of capital. In determining the dividend policy, the company should take full account of the number of size and cost of the various financing channels of funding sources, that consistent with the dividend policy and the company the ideal capital structure of their cost of capital.

However, dividend policy as one of the company's core financial problems, has been subject to close attention to all aspects. The dividend payment related to the interests of shareholders and creditors, but also to the continued development of the company's future. Therefore, to develop a reasonable and stable dividend policy is very important. On the dividend distribution behavior of the company's ownership structure, funding sources, taxes, laws and regulations and other aspects. A stable dividend policy is the profitability of listed companies and the continued viability of the embodiment. Baker, et al (1985) addresses that effects of dividend policy on a corporation’s market value is a subject of long-standing controversy.

The effect of capital structure on a firm's liquidation decision, in particular refer to debt financing.

According to Arnold (2008) addressed that capital structure refers to the way a corporation finances its assets through some combination of equity, debt. In general, the higher the expected return, also can afford the higher cost of financing, that operational risks and requirements for financing low-risk firms tend to choose equity financing; As for the traditional enterprise, the operational risks is relatively lower, there are expected return is also lower. They generally choose the low cost of debt financing. “Financing a business through borrowing is cheaper than using equity” (Arnold, 2008, p.794).

Capital structure decisions: Which factors are reliably important? Funds are necessary conditions for enterprises in production and business activities, the business capital accumulation and to attract debt financing and equity financing, debt financing is an important channel for enterprises to raise funds to promote enterprise development has an important impact. Debt financing will bring the risk of the enterprise to a correct understanding of the risks of debt financing, and enhance risk awareness and the development of effective risk prevention countermeasures. Different leverage of financing depends on the different companies in different strategic decisions. Both have a huge impact on the company's business operation.

As the BBC news (2011) has reported that India's national airline has been making huge losses and is struggling to compete in a growing crowded market. India's second-biggest airline is about $1.2bn in debt and struggling to raise cash. The shares in the carrier dropped 19.1% in early trading on the Bombay Stock Exchange to a record low, before recovering to close at a 9.45% loss (BBC news, 2011). The carrier's problems have gone from bad to worse in recent months as it has found it difficult to raise fresh capital, resulting in reports of unpaid fuel bills and other dues. The Creditors have already asked the company to raise $159m in equity so that its debts can be restructured. The State Bank of India, the airline's biggest lender, has warned that it must come up with a credible business plan before any restructuring of its debts (BBC news, 2011). If can’t borrow the funds from the banks, the ailing state-run airline wants government money to help turn its fortunes around.

Does the source of capital affect capital structure? There are some types of debt financing structure, the proportion of different sources of debt on corporate operation. The Bank credit is the most important sources of funding of a debt. In most cases, banks are also the main representative of the creditor to participate in corporate governance, the ability of enterprises to interfere and to protect the creditor assets.

There are any negative effects of debt financing? Firstly, the debt financing is to increase the financial risk of the enterprise. For the debt financing must ensure that their investment is greater than the cost of capital, also which will appear the phenomenon of income over expenditure. Secondly, excessive liabilities weakened the re-financing capacity of the enterprise. That companies to over the debt, is leading to its debt burden is too heavy. The maturity of corporate debt, if not regularly full debt service, and will affect the credibility of enterprises, also reduces the re-financing capacity. In addition, the increase in debt financing and management of the operating costs of enterprises, affecting cash flow. Debt financing of enterprises must pay interest on schedule, so that on the one hand to increase the operating costs of enterprises.

Socially Responsible Investment: Is it profitable?

Socially Responsible Investment (SRI) is a special investment philosophy that chooses to invest in enterprises not only concerned about its financial results for the performance, while concerned about the fulfillment of corporate social responsibility (Eurosif, 2010). And the traditional stock selection model, that can increase corporate environmental protection, social morality and public interest considerations, a more comprehensive study of corporate investment. In addition, that the SR of investors and also to apply their corporate identity of the shareholders, through active shareholder activism, to promote good corporate social responsibility (CSR) to fulfil. Regarding to Strasser (2011) explained that no universal definition for SRI. What drives socially responsible investment?

In recent years, with the deepening of economic globalization, people began to concern about global climate, environmental and other issues are increasing. CSR has become an important topic of extensive domestic and international concern. And SRI is it profitable? It is a combination of investment decisions and the economic, social, environmental unity of an investment mode. Investors not only be interested in the traditional return on the money, but also take into account social justice, economic development, world peace and environmental protection, so as to achieve sustainable development. Furthermore, as Strasser (2011) shows that in 2006 the United Nations launched the Principles for Responsible Investment (PRI), which is meant to be the first global benchmark for responsible investments.

Recent events like for instance the financial crisis, the nuclear catastrophe in Japan, global warming or the BP oil catastrophe might have been important factors for the large growth within the SRI industry. The development of SRI over recent years and that highlights the prospects for an increasingly strong connection with the practice of CSR (Sparkes and Cowton, 2004).

This can be reflected by the Clark (2012) reported that the chancellor has unsettled renewable energy investors by unequivocally backing a central role for gas in Britain’s energy mix. And according to Mr Osborne has said gas is cheap, has much less carbon than coal and will be the largest single source of our electricity in the coming years. Also unveiled £3bn of tax allowances to boost North Sea oil and gas investment. Moreover, he has comments come amid debate over whether a so-called “golden age of gas” will provide so much cheap and abundant natural gas that it will lock in years of investment in the fossil fuel at the expense of renewable energy sources, such as wind and solar. In addition, Mr Osborne remarked that renewable energy will play a crucial part in Britain’s energy mix – but I will always be alert to the costs we are asking families and businesses to bear. Environmentally sustainable has to be fiscally sustainable too (Clark, 2012).

SRI is a special kind of investment approach, and to fulfill their SR by not asking the enterprise to solve all social problems, but to pay attention to the most relevant to business operations activities with significant or potential impact on substantive issues, stakeholders, and will fulfill their social responsibility and enterprise production and management together. CSR must also adapt to the basic national conditions and the actual business of the national economic and social development, to understand and grasp at a higher level and broader scope.

The formation of the credit crunch and a significant impact

The credit crunch means the financial institutions to improve lending standards for business loans, and the loans higher than the level of market interest rate conditions, even reluctant to issue loans, that is resulting in the decline in credit growth, and the social reproduction of capital needs are not met. Lead to the causes of the credit crunch, including external and internal reasons.

The caused by the direct cause of the U.S. subprime mortgage market turmoil, that U.S. interest rates rise and the housing market continued to decline. The subprime mortgage refers to a number of lending institutions provided loans to poor credit rating and income borrowers. However, due to rising interest rates, leading to increased repayment pressure, would have bad credit users feel the pressure of repayment, the event of default may impact on the recovery of bank loans crisis. And the credit crunch affects only Banks?

It is clear that bankruptcy due to subprime mortgage lending institutions, investment funds forced to shut down, stock market volatility caused by the storm. It resulted in major financial markets around looming lack of liquidity crisis. Moreover, the credit crunch is an American Problem? U.S. "subprime crisis" is gradually emerging from the spring of 2006, that sweeping the U.S., EU and Japan, the world's major financial markets in August 2007.

In addition, the credit crunch is a general phenomenon, rather than individual phenomenon. The small businesses are unaffected by the credit crunch? Regarding to Ding et al, (2004) also explained that credit crunch is widespread, and its negative impact particularly affects small banks and enterprises.

As the credit crunch, the funds obtained through the banking system tend to decreased, that more impact on SMEs (small and medium enterprises) by credit constraints. This is because the low level of SMEs credit, and the lack of alternative sources of financing other than banks. The SMEs credit rating is lower than the generally large enterprises, that financial institutions to improve lending standards to SMEs excluded. On other hand, compared with large enterprises, the SMEs through less equity financing or bonds issued to obtain funds. Once formed of the credit crunch, the real economy sector that lack of funds may cause economic activity cyclical "break". In particular, the continuing credit crunch will cause severe economic recession.

At present, according to Wigglesworth (2012) reported that “largest companies are mostly in fine fettle after cutting back on borrowing, trimming workforces and hoarding cash since the financial crisis. Many financial metrics of corporate health are at their strongest levels in decades.” But smaller companies in many countries still face a testing decade, as many banks in developed markets seek to shrink their loan books due to market pressures and regulatory changes, even as a wall of loan and bond repayments looms (Wigglesworth, 2012).

In addition, a recent BBC new (2012) pointed out a real debt of UK, which reflects why the financial crisis, and why has the recovery been so slow?  As this question, that many people have may blame the banks, which are banks made ​​mistakes. It is truth?

As Broadbent a member of the Monetary Policy Committee has argued that really fault tie to household for running up so much debt. And his also explained debt is indeed a large part of what caused the crisis, and a large part of the explanation for Britain's historically feeble recovery (BBC news 2012). There are can be seen in the right chart, that about the massive increase in UK household debt in the years before the bust, that it is the slow process of unwinding Britain's massive debts - public and private.

Furthermore, Broadbent has provide the another chart shows how much slower this recovery has been, in Britain and other parts of Europe than the long-term average, which includes other times when the government has tightened fiscal policy early on. As he points out, the chart showing the rise of household debt is usually accompanied by another one, adding all the debts of the UK private sector together, showing how Britain is the "most indebted country in the world" (BBC news 2012).


On other hand, There are by common view of it's true that losses in the UK financial system played a big part in the UK's crisis. But someone is disagreed with Broadbent, and argued that Households, as a group, have a lot of debt. But they also have a lot of assets - in fact, a lot more. (See right chart). And Households' total wealth, including housing, was worth eight-time annual disposable income at the end of 2010. That's above the 25-year average, despite everything that happened in 2008-10 (BBC news 2012). There are increase in UK households debt will bring any effect on the Britain's economic crisis recovery?