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Changing perspectives on distribution policy: The evolution from dividends to share repurchases.

The purpose of financial management is to create value for stock holder. Two different branches of thought originate from the early literature on corporate distribution policy policy, especially relating to cash dividends. First thought emphasizes that dividend are important for determining the firm value. This work is done by William (1938) Gordon (1959) and Linter (1956). Second perspective attributable to Miller and Modigliani (1961) and echoed in black (1976) suggest dividends are irrelevant for firm value and possible value destroying.

The objective of this paper is to review and synthesize the literature how the perceptions on corporate distribution policy have changed over time. Higher amount of dividend was paid at early 19th century as 90% as compare today as 1.2 % of the total return of investor.

Literature review:
The harder we look at the dividend picture the more it seems like a puzzle, with piece that just doesnt fit together. Two major approaches used by researcher One approach used secondary data from capital markets and accounting statement. Second approach used survey methods to obtain primary data from financial

Manager about distribution policy. The classical work of William in which William develop a discounted cash flow model which shows the intrinsic value of firms stock as present value of growing stream of dividend. Linter is one of most influential of economist of classical work, published a seminal study that include a model of how manager set their firms dividend policy. Other study such as Fames and Babied support the Linter evidences. A key finding is that profits and prior years dividends exert a major influence on current dividends. For example they find that most important determinants of dividend are the pattern of past dividends. The stability of earnings and level of current and future cash flow. Linters key finding still holds namely dividend policy is very conservative. M&M develop a model that shoes the value of a company is determined by its assets and cash flows generated by those assets and not by cash flow are distributed to shareholders.

Result & Analysis:

Firms would want to pay dividends suggests corporate dividend policy reflect manager expectations firms earning a specific application of an economy known as signaling. The general harmony among recent studies of dividend and earnings is that the decision to initiate or raise the firms dividend is based on past and current earnings growth not expected growth in future decisions. Firms paying out dividend relatively more institutional investors mixed empirical evidences exist as to whether dividend are successful in reducing agency cost. Researcher have also propose that dividend payments are associated with low firm risk so thats why not only has the average dividend yield on U.S stock been in long-term decline but the number of firm paying dividend has also decrease.

Stock Repurchase:
The three most common explanations for stock repurchase include: A tax motivated substitution of repurchase for dividend A signaling explanations Agency cost According to the tax motivated hypothesis manager may use share repurchase instead of cash dividend to minimize taxes. For stock holder The basis of the signaling explanation is that a firms management have better information about company true values than outside investors. Share repurchase provide a means of dealing with free cash flow how agency problems. Repurchase provide a way to reduce agency cost associated with manager over investing in non-producing activities. Several other motives for a firm repurchasing its stock share. Repurchase provides manager with a way to change their firm capital structure. U.S firm rarely special designated dividends. Researcher although suggests that share repurchase have not replaced SDDs.Manager also confirm they would prefer share repurchase to an SDD when they perceived that firm stock was undervalued.

One factor contributing to the rise in repurchase is the improved regulating environment resulting from securities & exchange commissions adoption rule in late 1982. Second are economic and financial conditions. Flexibility of repurchase relative to dividends. Repurchase serve as a way to return capital to investors at the appropriate time .

My Findings:
Dividend once constituted a part of an investors total returns. But this role has declined markedly. Over time although many companies still pay cash dividends but share repurchase have risen dramatically and are now an important part of firms payout policy.