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.