Dividend policy : between relevance and irrelevance; what makes it impossible for theory and practice to cohabit.

Abstract

What is the optimal payout strategy? A question that has been titillating three groups of agents in modern corporate finance for more than half a century: Managers who intend to maximize the value of their firm, investors who want to take accurate and informed decisions concerning their investment choices and theorists who hope to grasp the essence of market forces, their causes and their consequences. What is the optimal payout strategy? Each previously mentioned group, and every subgroup has a different answer. The issue is far from being settled. From a theoretical perspective, the matter seems to be answered by the highly regarded theory of dividend irrelevance. However, this answer does not come without being contested, because no matter what is argued, cash is still king, as the “bird in the hand theory argues”. From a practical side, dividend distribution has been a long term practice in developed markets. The fact that it exists is, for some, enough evidence of its importance; markets know better. However, a lower propensity to pay has been evidenced in some markets, even though this weaker likelihood to distribute dividends appears to be relatively thin when factoring in the highly central idea of agency costs. With managers being free electrons, investors prefer to disgorge cash from their companies if no real growth opportunities arise. What is the optimal payout strategy? The reader will not find the answer in this paper. However, our intention is to shed some light to what has been done in the economic circle to explain the issue, and how good of a job have these explanations been doing for the past sixty years. In fact, both mainstream and heterodox theories of dividends have been limiting themselves to neoclassical economic concepts that have led them right where they started. Maybe it is time for a real independence of the field. Maybe it will help Financial Economists do a more effective job in explaining and forecasting changes in markets. A multidisciplinary approach might be mor