THE IDENTIFICATION OF DIVIDEND POLICIES AND AN EVALUATION OF THEIR IMPACT ON FIRM VALUE

The theory of financial management has been stymied by the unresolved issue of the importance of dividend policy. If there is an optimal policy, per se, then there is no independently optimal investment or capital structure decision. All three policy realms must be considered simultaneously in order to maximize the value of the firm. If, on the other hand, a residual payment of earnings is not, in and of itself, detrimental to stock value, the theory of the firm is simplified, and financial managers are free to pursue capital structure and investment objectives independent of dividend policy constraints.;Two major empirical issues were addressed in this investigation. The first involved the definition and identification of some earning disbursement patterns adhered to by New York Stock Exchange companies over the twenty year period from 1956 through 1976. This identification process contrasts sharply with previous empirical studies that have used dividend yield as a proxy variable for dividend policy. Six basic dividend payment patterns or policies were identified in the market. These were: the high stable dollar payout, the low stable dollar payout, the high constant percentage payout, the low constant percentage payout, the residual payout and an unidentified payout. The results of the dividend policy classification process indicated that contrary to conventional wisdom most firms do not stabilize their dividend payment. In addition, the results suggest that the use of the dividend yield variable as a proxy for dividend policy may not be consistent with identifying a pattern of dividend payment (dividend policy).;The second empirical issue concerns the risk adjusted performance of portfolios homogenous with respect to dividend policy. Risk adjustment was accomplished via an ex post market risk-return line that has its basis in current capital market theory. The results of the comparison of the homogenous dividend portfolios to the market benchmark suggest that certain dividend payout patterns may be favored by investors. Specifically, the residual and unidentified policy portfolios consistently exhibited returns above what were expected for the level of portfolio risk while the low constant policy portfolios exhibited returns less than were expected for the level of risk.;The finding of dividend policy relevance was modified by two findings related to the systematic risk of the dividend policy variables. The first finding indicated that firms with similar risk structures gravitated toward the same dividend payment pattern. In addition, it was shown that a significant relationship existed between the risk associated with a dividend policy and the residual or excess return of the policy. Such a result suggests that the ex post market model may be incorrectly specified in terms of omitting a relevant variable, possibly associated with the dividend policy of a firm. As a result the question of dividend policy irrelevance could not be resolved. However, the methodology used in this study is new and provides insights to the relationship between a firm's dividend policy and its value.;The purpose of this study is to determine whether the dividend payment pattern a firm adopts affects the value of the firm. Traditional valuation theory states that in a perfect capital market it makes no difference whether or not shareholders receive their cash flows as dividends or capital gains. Thus, in the absence of real market restrictions to trading, dividend policy is irrelevant since it does not affect shareholders' wealth. In contrast, extensive empirical research has failed to provide a consensus answer to the question concerning the relevance of dividend policy to firm value.