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1、Available online at ScienceDirectProcedia Economics and Finance 14 (2014) 387 396International Conference on Applied Economics (ICOAE) 2014Theories on Dividend PolicyEmpirical Research in Joint Stock Companies in KosovoBesnik Livoreka1*, Alban Hetemi2, Albulena Shala3, Arta Hoti4, Rrustem Asllanaj1
2、University of Prishtina,Faculty of Economics Teaching Assistant4 University of Prishtina,Faculty of Economics Teaching Assistant 5 University of Prishtina,Faculty of Economics LecturerAbstractGlobal experience makes clear the importance of dividend policy as a promoter in large corporations. Corpora
3、tions are the backbone of the economy as a whole, they are a key source of jobs and certainly the largest taxpayer of an economy. In recent years it appears that most common way of distributuion in global corporations is cash dividend. In the market we can also face the companies that do not pay cas
4、h dividend, and companies that do not pay dividend at all.Nowadays in the market economy, corporates consider the decision to pay dividends as a quite relevant, because in this way is known the remaining cash flow for investment back into the corporation and cash flow distributed to shareholders. A
5、stable dividend policy gives positive signal to shareholders and can be seen as positive corporate performance. Therefore, this paper tends to face the policies which can be applied from companies on dividend distribution and the factors which indicates in following a certain policy.The purpose of t
6、his paper is to provide information to stakeholders about the factors which determines dividend policy and its role in todays corporations. 2014 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license 2014 The Authors.Published by Elsevier B.V.(http:/crea
7、tivecommons.org/licenses/by-nc-nd/3.0/).Selection and/or peer-review under responsibility of the Organising Committee of ICOAE 2014.Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014Keywords: Dividend policy, Payout Ratio, Dividend Distribution, Dividend Decl
8、aration, Declaration Date, Gordon Theory, Modiglian Theory* Corresponding Author, Teaching Assistant at University of Prishtina, Faculty of Economics besnik.livorekauni-pr.edu2212-5671 2014 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http:/cr
9、eativecommons.org/licenses/by-nc-nd/3.0/).Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014 doi:10.1016/S2212-5671(14)00727-8388Besnik Livoreka et al. / Procedia Economics and Finance 14 (2014) 387 396“Do you know the only thing that gives me pleasure?1. IMP
10、ORTANCE OF DIVIDEND POLICYIts to see my dividends coming in”John D. RockefellerDividend is a payment either in cash or other forms that corporations pay to their own shareholders. They are regarded by shareholders as the return on the investment made in the corporation. The Board of Directors has pr
11、imary responsibility for drafting the dividend policy and decides whether to pay dividends or not? We raise a very basic question: Why should corporations have a strategic policy for dividend payment? Players in the market, shareholders and investors do not prefer surprises. If the corporation does
12、not have a stable dividend policy, the corporate shareholders will not have any more interest to keep their capital in such corporations. Consequently, the stock price will fall. When shareholders do not receive the expected return (dividend), they express dissatisfaction by selling shares. Therefor
13、e, corporations should pay special attention on dividend policy.There are a variety of factors that affect dividend policy, but we will mention some of them, have greater impact. Factors that affect dividend policy can be divided into two groups:x Internal factorsx External factorsExternal factors,
14、which influence the dividend policy, are tabulated as follows:The overall economy in case of uncertain economic conditions and business, management may decide to retain a significant portion of income in the form of retained earnings, with the aim of creating reserves to absorb future shocks.In the
15、depression, management can hold a large part of its profits to maintain corporate liquidity position. But in periods of prosperity management may be more liberal and pay more dividends due to greater availability of cash flows.Situation on Capital Markets when there is a stable capital market and th
16、ere are frequent movements of prices, ie when there are unstable prices, then there is a tendency for management to have a more liberal dividend policy. And vice versa, when we have unstable market situation, when company faces frequent price fluctuations, then the dividend policy would be conservat
17、ive.Legal Restrictions legal regulations vary from country to country, regulations governing dividend policy. Some legal rules stipulate that dividends can be paid from the profit of the current year or from the profit of last year which is kept as a reserve. The rate of capital consumption is consi
18、dered a protector of shareholders and creditors, prohibiting the payment of dividends out of capital.Contractual restrictions lenders can sometimes put restrictions on dividend payments to protect their interests (especially when the corporation is experiencing liquidity problems). Suppose made a lo
19、an agreement stating that the corporation will not declare any dividends for as long as the liquidity ratio is less than 1:1. Or corporations will not pay more than 20% dividends as long as the loan is not repaid, etc. Entries in capital markets, a large corporation with a steady profit, has certain
20、ly easier to access the capital markets and thus can borrow money from the markets. But for small corporations and start -up ventures is difficult to obtain funds from the capital markets, therefore it is necessary to keep profits as retained earnings due to the need for additional funds for various
21、 investments.Internal factors affecting the dividend policy are numerous, but mention some of them:Shareholders expectations, though the place dividend rate, it is always in the interest of shareholders. Shareholders expect two types of returns: Capital gains, Dividends:Cautious investors look for d
22、ividends because:x This reduces the uncertainty (capital gains are uncertain);x Indications for corporate financial strengthx The need for income: Some invest in stocks in order to receive a regular income to meet their living expenses. Ciceri, Beshir & Xhafa, Halit, “Financial Management”, Tiran,20
23、06, page 621Besnik Livoreka et al. / Procedia Economics and Finance 14 (2014) 387 396389The fiscal situation of shareholders affects the desire for dividend. Shareholders, whose corporations operate in countries where the tax on dividends is high, prefer, to replace dividend with higher income in a
24、payroll list. But on the other hand, shareholders with smaller incomes wish to receive higher dividends, because their taxation is lower. Besides these factors, should be taken into account the situation of retained earnings, corporate liquidity etc. In general there are a number of factors that aff
25、ect dividend policy, such as legal norms (legislation and court decisions that affect dividend policy), the liquidity situation, the need to pay off the loan, the loan limits on contracts , the stability of retained earnings, access to capital markets, control, shareholder fiscal situation, etc.Fact
26、ors affecting low dividend payment are:x Taxes is considered one of the factors that affect the dividend payment. For individual shareholders tax rates on income from dividends are higher than taxes on capital gains. Dividends received are taxed as regular income.x Costs of Flotation - various corpo
27、rations in some situations decide to sell new shares if order to pay dividends. Sale of new shares can be expensive, especially if are taken into account selling expenses (Flotation), then the value of the new shares will fall.x The dividend restrictions - In some situations the corporation may face
28、 restrictions on paying dividends. The law prohibited corporations on paying dividends if the dividend amount exceeds the amount of retained earnings.Factors affecting the high dividend payments are:The desire for the following income - many individuals want higher incomes (ie those with fixed incom
29、es, people who are already retired) Taxes and legal benefits of high dividends - Earlier we saw that dividends are taxed in an unfavorable manner to individual investors. However, a significant number no adverse treatment by keeping productivity high dividend, rather than securities, bringing the di
30、vidend yield is low.Investors in corporations - A deduction of taxes on dividends sensitive occurs when a corporation holds shares in another corporation. In such cases offered by the 70% tax deduction.Exempt investors - These include some of the largest investors in the economy, such as eg pension
31、funds, relief funds, funds of various trusts etc.2. RETAINED EARNINGS AND DIVIDENDSWhen it comes to dividend cannot be ignored retained earnings and net income of the corporation. To have a clear level of dividends which should be paid by a corporation must be found the relationship between dividend
32、s and net income level. Example: Assume that the corporation Bes-Alb has generated net income in the amount of EUR 10,000, and pays EUR 3,000 dividends. Then we will have: From the example shown the corporation Bes-Alb for every 1 euro of current year profit pays EUR 0.30 dividend. Obviously the hig
33、her the net income is the higher will be the dividend yield. When we talk about net income we should not ignore the difference between profit and net income. Revenues and profits do not necessarily appear in the same time*.Assume that the corporation Bes-Alb had sales in the amount of EUR 1,000,000,
34、 and the total expenditure was EUR 400,000, then we have following table:Total Income1,000,000Total Expense400,000Net income600,000 Luboteni, Gazmend, Finance Corporation, Prishtin, 2007, page 130 Luboteni, Gazmend, Finance Corporation, Prishtin, 2007, page 130 * Ibid., page 371390Besnik Livoreka et
35、 al. / Procedia Economics and Finance 14 (2014) 387 396Liquidity from current year0 Table 1 Net income of Bes-Alb CompanyAlthough the Corporation generated net income in the amount of EUR 600,000, the company does not have available cash at the end of the year. If the company is not liquid, it canno
36、t distribute dividend. This means that corporate liquidity is a crucial factor which affects the dividend payment policy. So, even if the corporation results are negative in the current year, the company can still pay dividends if there is enough cash. Many corporations have lost the value of their
37、shares from the decision not to distribute dividend. Example: Edison Company of New York lost one third of its stock value due to non-payment of dividend. In 1974, Edison Company has forgotten dividend payment of the first quarter, which did not happen since 1885.Many shareholders, who expected to r
38、eceive dividends (even many people who have been retired), after the announcement for non-distributing dividend from Board of Directors, sold their stock, this act contributed to share price reduction. Share value dropped from 18 to 12 . This decision in the long term can give a positive impact in i
39、ncreasing the stability of the company, but in the short term it resulted in a decrease on stock prices.3. THEORIES ON DIVIDEND POLICYSince at the beginning of the chapter comes the question: Is important dividend policy for for financial markets, shareholders, and the level of importance, as well a
40、s if the question if dividend payment should be fixed or variable? To answer this questions you should see the below mentioned ideas / suggestions / observations of many researchers of this policy like: “Franco Modigliani, Merton Miller, John Gordon, and Lintner”. These Nobel laureates have given mu
41、ch for theories of dividend policy.Theories dealing with the dividend policy were splited into three group theories:x The first theory, which supports the idea of paying very high dividendx The second theory, which supports the idea that dividend policy is irrelevant andx The third theory, which sup
42、ports the idea that investors prefer a low dividend.Gordon and Lithner TheorySupporters of this theory were Lintner (1962) and Gordon (1963). Theory on paying the high dividend, is based on the fact that shareholders prefer a safe return, respectively they have risk aversion. So, a quick dividends r
43、eceived is less risky than a potential profit from capital gain, which will be taken in the future more or less distant. Consequently, shareholders will seek return of their shares as high as possible and also can make to increase the value of shares of a corporations capital markets, delivering hig
44、h dividends. This line of thought, basically belonged to the widespread opinion in the United States of America and the United Kingdom, at least for a certain period of time. Rubner (1965) had given the opinion that if the entire retained earnings will be paid out as dividends, it will double or eve
45、n triple the value of their respective shares of the corporation. This theory can be presented graphically to have a clear idea of Gordon and Lintnerit, below is presented in graphic form: Ibid., page 373 Fischer Black, The Dividend Puzzle , pg 2 Ciceri, Beshir & Xhafa, Halit, “Financial Management”
46、, Tiran,2006, page 594Besnik Livoreka et al. / Procedia Economics and Finance 14 (2014) 387 396391Graph 1 Gordon and Lithner TheoryAs Gordon and Lintneri argued that dividend received from shareholders is less risky than the profit that could be realized from their investment of profit in corporatio
47、n to get a capital gain realization, therefore investors demand greater returns (ks) and only when the return has as its components (g), which is greater than D1/Po. According to Gordon and Lintner to offset 1% dividend reduction, company need more than 1% growth rate. In our case the rate of return or cost of capital would be 13% if the corporation pays dividends the entire retained earnings. By lowering the dividend payment ration, the cost of the own equity will increase. In concrete example would be a 15%, at payment rate 0%, ie when the dividend yield is zero