Dividend Policy and Share Valuation

Abstract

Retained profit provides a significant proportion of new finance. This is not surprising for, apart from borrowing, the alternatives are: that existing shareholders dig more deeply into their own pockets by way of a rights issue; or that the company makes a public issue of shares. Only when all other sources are exhausted will the latter course be followed for this would dilute existing shareholders' control over the company. Regarding a rights issue, it would be illogical for a company requiring finance, and having profit readily available, to distribute it all as dividends and then ask for some of it back. However companies do continue to pay dividends whilst making issues of shares, so how are their dividend, financing and investment policies reconciled? This question has exercised the minds of academics and financial managers in recent years but without any completely satisfactory answer being produced.