17.1 THEORIES OF DIVIDEND

The theories explaining dividend policy are divergent. The divergence is related to the very assumption of perfect capital market, vis-à-vis, imperfect market conditions. It is also related to whether dividend payments have any relevance to maximising the shareholders’ wealth. Based on these divergent views, the theories of dividend can be put into three groups. They are as follows:

  1. Dividend irrelevance approach explaining that the payment or otherwise of dividend has the same impact on the firm’s value, and therefore the shareholders are indifferent between dividend payment and retention of earnings. This theory has been propounded by Miller and Modigliani.
  2. Dividend irrelevance approach preferring retention of earnings. ...

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