Dividend Policy and Share Price Essay Example | Topics and Well Written Essays - 1500 words

Dividend Policy and Share Price - Essay Example Empirical studies however showed mixed evidence, using the data from US, Japan and Singapore markets. A number of studies found that stock price has a significant positive relationship with the dividend payment [Gordon (1959), Stevens and Jose (1989), Ariff and Finn (1986), and Lee (1995)], while others found a negative relationship [Loughlin (1989) and Eastonand Sinclair (1989)].Before we have a look at the factors which affect the dividend of the company, we must give a list of few factors involved with the firm in deciding the dividend policy which are:-1.  Legal Constraints. 2.  Contractual Constraints3.  Owner Consideration4.  Market Consideration5.  Tax ConsiderationsA company can pay dividends in either of the two ways:-1.  Cash Dividend2.  Stock DividendIn both the cases mentioned above, in ideal market, there should be no consequence of the dividend declaration.   The former has been discussed earlier whereas in the case of the latter, the market generally ma kes the requisite correction.   If a company XYZ declares a share dividend of 1:1 (i.e. 1 extra share for every single share held) and the current market price is $10 then after the record date, the share price must ideally come to $5 keeping the market capitalisation as constant.The important factors which specify the dividend policy of a firm are:-1.  Payout – High/Low2.  Whether a formal policy on stable dividend has been drafted3.  Stock dividendsThe primary objective of the dividend policy is to decide upon the excess liquidity.