2.

0 Introduction of dividend policy

Dividend policy is follow by a firm in determine the size and pattern with refer to the payout
policy to shareholders over time. Firms distribute cash to shareholders through cash dividends;
share repurchases, and specially designated dividends. Moreover in the previous literature of
dividend policy have different in two about the relationship between cash dividends and firm
value. Thus, discuss in the different of dividend irrelevance and dividend relevance (H. Kent,
2015).
Dividend irrelevance which is dividend are indirectly to effect on the firm value, the value of the
firm is determine by the assets and the capital generated by the assets. Besides, in the perfect
and efficient capital market, establish the dividend policy is irrelevance to share value
(Laurence .B, 2015). Dividend relevance in which of dividend are affect shareholder benefit or

wealth as reflected in the intrinsic value of the firms stock has exist in long-term period.
Moreover predict on the firms growing stream of dividends and investors expected the
dividends of return, which have a model call discounted cash flow. Investor will proper to
understand and aware the largest of proportion in the total return on the portfolio that are
invested (Talla .M, 2006).
Dividend and earning management that literature to identified a connection of a firm and
dividend policy. Earning management is spending on the new project or portfolio to meet
predetermined earnings targets, which occurs either of accrual items or real activities seem like
capital expenditures (Monica .S & Akshay .G, 2012).
2.1 Six dividend policy
Bird-in-the-hand theory
Present about the current of dividend payments receive either dividend retention for reinvestment
in new project or portfolio and retain uncertain return on future. This theory is asserted on paying
higher dividend either of stable dividend payment, seen the dividend payments increase will
effect on the value of firm, while future stock price appreciation is uncertainty. Firm risk on seem
of project invested, which riskiness investment will affect the firm stand on dangers edge (H.
Kent, 2015).

Bird in hand theory; represent the uncertainty information asymmetry in our world. Dividend
pay-out will differently base on revenue. For uncertainty cash flow, as investor extremely prefer
dividend rather than the firm to retain earning. Thus, on increase the value of firm, which
dividend should pay and reduce the rate of return (Monica .S & Akshay .G, 2012).
Taxes and tax clienteles
Investor are more prefer the firm retain in the volume of cash instead of paying dividends, the
reason of tax rate on dividends are always higher than the long-term capital gains. Therefore, the
different in the tax rates will consequence in different tax clientless regarding dividends (H.
Kent, 2015).
In the clienteles effect is present of differences of the value on tax are influence the different in
dividend, therefore will cause of different in group of clienteles. For the example, which indicate
the value on the hand of its, the client or investor are the side supposed to be, which are indicate
on more cash as dividend and another are indicate on the retain of earning by the firms value,
rather than the dividend. Therefore, different behavioural on the firm value will convince
differently clienteles (N. Bhattacharyya, 2016).

Asymmetric information / signalling theory

Determine on the signalling theory, the inner information of the firm and managers to decide of
the dividend payment levels to convey the firms future information to the investors and reduce
asymmetries (H. Kent, 2015). While, managers have motive to signal this private information to
the public, this would be increase the firms value on the intrinsic value. Thus, the information
will publish to investing public and generate a retaining in abnormal value on the announcement
date (H. Kent & Gary E, 2012).
signalling theory that involve of private or inner information to achieve in future profits, but its
look like standing in dangers of edge either of paradise. Which indicate the mean of, inner
information can bring the prediction of largest profit to the firm, but for the opposite, its also can
reduce the profits base on the information quality. Therefore, the dividend are reflects the

consequences of investment to increase or decrease. The motive of signalling is action to take in

future profits, actions to get external finance and the action to prevent takeover (Talla .M, 2006).
Agency costs
Refer on the public of investor and the relationship between a firms value, some of the conflict
will occur when the stock value are decline or reputation getting spoiled. Thus, paying dividends
can be reducing the agency problem and overinvestment (H. Kent, 2015). While, fixed on paying
dividend will indicated the grow are move slow of that firm and the flow on uncertainty
investment will be dangers, therefore managers willing to submit the firm report to the market.
Moreover, As a firm will proper in the goal of maximize the profits, which indicate they are
paying cash to new investment are frequently, therefore as the investor will monitor managers
investment will bring value on the future and making decision (Hamid Ullah, Asma Fida, &
Shafiullah Khan, 2012).
Agency cost can be argued as the benefits between managers and shareholders, which indicate
the right for achieve their self-interest, as manager are more interest on power right and job
opportunities rather than maximize profits, but shareholder are only concern on their wealth,
which conflict effect on agency problem. Therefore, on this theory Shareholder will monitor
managers which they support to be invested and managers will pay out the dividend to reduce the
conflict between shareholders (Monica .S & Akshay .G, 2012).
Firm life-cycle theory
The firm should distribute the free cash flow to shareholders of dividends, and ability to generate
cash in the opportunities on profitable investment. This theory sharply contrasts with the
signaling theory of dividends, which predicts that a firm will pay dividends to signal to the
market that its growth and profitability have improved. Therefore, refer on a firm in the
relationship between the return on equity and cost of capital, which indicates the prediction of
the firm life cycle stage (H. Kent, 2015).
Life-cycle which mean the stage of the value for current market position, which investor are
looking for the value for invested and redeem the dividend or return that they are prefer.
Example of the current stage are being on growth, thus the dividend will increase follow on the
scale, in the opposite, which are declining will decrease the dividend at the spot also. Therefore,

the firm are willing to pay dividend to reduce the shareholder conflict and expected on future
decline (H. Kent & Gary E , 2012).
Catering theory
Managers are concern the important of investor depression in decision of dividend policy.
Managers cater to investor demand on paying dividends, when investors are required on this
method. On the opposite, when the investors are required non-dividend paying, managers will
cater to reduce or not pay on dividends. Catering theory can explain dividend initiations better
than dividend omissions, and also conclude that individual firm characteristics should be
integrated with investors sentiment to explain dividend policy (H. Kent, 2015).
Catering theory can mean have accommodated or fulfil current satisfaction of its shareholders.
They cater the demand of shareholder and paying dividend on the investor who are payer on
premium stock and reducing dividends as firm trade at discount when shared of dividend pay (H.
Kent & , Gary E 2012).
References
Hamid Ullah, Asma Fida, & Shafiullah Khan (2012)
The Impact of Ownership Structure on Dividend Policy Evidence from Emerging Markets KSE100 Index Pakistan. International Journal of Business and Social Science
H. Kent Baker Rob Weigand (2015)
Managerial Finance, Corporate dividend policy revisited
Monica Singhania & Akshay Gupta (2012)
Determinants of Corporate Dividend Policy: A Tobit Model Approach
Talla M. Al-Deehani, (2003)
Journal of Economic and Administrative Sciences Determinants of Dividend Policy: The Case of
Kuwait
N. Bhattacharyya (2016)
Managerial Finance, Dividend policy: a review

H. Kent Baker Sujata Kapoor (2015)

Managerial Finance, Dividend policy in India: new survey evidence
H. Kent Baker and Gary E. Powell (2012)
Journal of Asia Business Studies, Dividend policy in Indonesia: survey evidence from executives
Laurence Booth Jun Zhou (2015)
Managerial Finance, Market power and dividend policy