Optimal Dividend Policy Based on Optimal Capital Structure

Chapter

Abstract

For purposes of maximizing corporate value, I have proposed “Three Pillars of Financial Strategies” such as Equity Spread and Value Creation, Value-Creative Investment Criteria, and Optimal Dividend Policy based on Optimal Capital Structure. After funding value-creative investments subject to threshold as specified in Chap.  5, Japanese companies have to think about cash repatriation to shareholders in order to optimize the balance sheet, thereby avoiding both undercapitalization and overcapitalization. Without proper corporate governance and sophisticated dividend policy, cash held by Japanese companies tend to be discounted as evidenced by Chap.  2. This chapter presents the third value-creation strategy related to optimal dividend policy based on optimal capital structure in a bid to unlock corporate value in Japan. Miller and Modigliani (J Bus 34:411–433, 1961) argue that dividends do not generally affect corporate value under perfect market premises, but they actually do in Japan (Ishikawa in Dividend policy for moving stock price-empirical analysis of collaboration effect. Chuokeizai-Sha, 2010), the land of stable dividends: 30% is corporate Japan’s average dividend payout ratio, and the Life Insurance Association of Japan requires 30%. Japan’s 30% myth persists because Japanese companies mistakenly believe that 30% parallels U.S. averages and stick to this average as a lockstep mentality. They fail to realize that U.S. counterparts set payout ratios according to their stage in their lifecycles. The book’s survey results corroborate that investors focus on ROE (Return on Equity) and governance in conjunction with dividend policy as well. To break the chain of Japan’s 30% myth, this chapter charts total repatriation ratios including not only dividends but also share buyback (TRR), not dividend payout ratios per se, for Japan and other countries. It finds that Japan’s TRR is 33% versus 85% in the US and 63% in Europe. I therefore propose an optimal dividend policy based on an optimal capital structure as proven by investor surveys, interviews, comparisons of total return and empirical research. That optimal dividend policy considers companies’ stages in their lifecycle and balance sheet management as well as issues of corporate accountability.

Keywords

Myth of 30% payout ratio Dividend puzzle Payout ratio DOE MM Irrelevant theory Corroboration effect Signaling effect Catering effect Residual theory Free cash flow hypothesis Optimal capital structure Pecking order DDM 

References

  1. Black, F. (1976). The dividend puzzle. The Journal of Portfolio Management, 2(2), 5–8.CrossRefGoogle Scholar
  2. Brealey, R. A., Myers, S. C., & Allen, F. (2002). Principles of corporate finance global edition (10th ed.). McGraw-Hill.Google Scholar
  3. Cunningham, L. A. (2008). The essays of Warren Buffet for corporate America. Pan Rolling. (Translation supervised by Masuzawa, H.)Google Scholar
  4. Hanaeda, H., & Serita, T. (2009). Survey research for payout policy: Mainly comparing Japan and US. SAAJ Journal, 2009(8).Google Scholar
  5. Ishikawa, H. (2010). Dividend policy for moving stock price-empirical analysis of collaboration effect. Chuokeizai-Sha.Google Scholar
  6. Jensen, M. C. (1986). Agency cost for free cash flow, corporate finance, and the take-overs. American Economic Review, 57(2), 283–306.Google Scholar
  7. Kondo, K., & Yanagi, R. (2013). Financial, IR & SR strategies for improvement of corporate value. Chuokeizai-Sha.Google Scholar
  8. Life Insurance Association of Japan. (2015). Survey results on approaches toward enhancing equity values FY2014. Life Insurance Association of Japan.Google Scholar
  9. Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth and valuation of shares. Journal of Business, 34, 411–433.CrossRefGoogle Scholar
  10. Myers, S. C. (1983). The capital structure puzzle. The Journal of Finance, 39, 575–592.CrossRefGoogle Scholar
  11. Suda, K. (2004). Strategies and effect of disclosure. Moriyama-shoten.Google Scholar
  12. Yanagi, R. (2008). Utilizing dividend on equity ratio (DOE) on management accounting. Kigyo kaikei, 60(1), 90–96.Google Scholar
  13. Yanagi, R. (2013). Study for dividend policy and IR activities. Investor Relations, 2013(7), 58–77.Google Scholar
  14. Yanagi, R. (2014a). Importance of optimal dividend policy based on optimal capital structure. Kigyo kaikei, 66(7), 44–51.Google Scholar
  15. Yanagi, R. (2014b). Study for Japanese-version Stewardship code and capital efficiency. Investor Relations, 2014(8), 48–62.Google Scholar
  16. Yanagi, R. (2015). The ROE revolution and financial strategy. Chuokeizai-Sha.Google Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2018

Authors and Affiliations

  1. 1.EisaiBunkyōJapan

Personalised recommendations