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.