What´s Dividend Policy?

Dividend policy is considered a very mysterious field of corporate finance and has attracted the interests of many financial economists over the past few decades. Various theories have been developed to explain this problem, and it can be divided into two main schools of thought. The first is the dividend of the main supporter Miller and Modigliani (1961), the dividend does not affect the value of the company, the second is the dividend related, the dividend affects the value of the company.

Dividend policy decision making is one of the important decisions of corporate finance. The dividend policy is to maximize shareholder wealth and provide sufficient funds to the company. Companies with unstable dividend policy are considered to be at high risk by investors. (Shim & Siegel, 1998) In general, the company maintains a stable dividend payment policy. Leverage given by total liabilities / total assets is inversely proportional to dividend payments. In other words, the higher the leverage of the company's capital, the less dividends will be paid.

Financial leverage is one of the main explanatory variables of the company's dividend policy. This variable is defined as long-term borrowings and total assets. Companies that have a very high leverage and are unable to repay debts face bankruptcy risk. This fact can be explained by the fact that companies with higher debt may pay lower dividends to shareholders because it is necessary to use cash flow to repay the debt. . Meanwhile, Aivazian et al. (2003) states that companies with low debt can pay dividends and maintain. Financial leverage has a negative correlation with payment of dividends. There are many studies that seem to support this negative relationship. The result of Rozeff (1982) shows that companies with high leverage tend to pay small amounts of dividends. Furthermore, Crutchley and Hansen (1989) Jensen et al. (1992), Bradley et al. (1998), Faccio, Lang, and Young (2001) point out that financial leverage has a negative impact on dividend payment.

Determinants of the company's dividend policy can play an important role in influencing dividend payment. According to Pruitt and Gitman (1991), risk is one of the factors determining the company's dividend policy. In addition, there is evidence that risks may affect the company's dividend policy. This was provided by a study by Lintner (1956), Brav et al. (2005). If the business risk is high, the relationship between current profit and anticipated future profit will be uncertain. Therefore, the company avoids the obligation to pay high dividends. There are many studies showing that companies with high risk show that dividends paid to shareholders is reduced due to the variability of profits. Some of these studies were conducted by Rozeff (1982), Lloyd et al. Men (1985), 1993; Mohd et al., 1995 and Colins et al. People (1996). They use the company's beta value as a substitute for the company's business risk. This beta version is expected to adversely affect dividend payment.