In a perfect capital market, a company”s dividend policy is irrelevant in determining the firm”s market value. That is, it does not make any difference whether the company raises capital from retained earnings (i.e., not paying dividends) or from the sale of additional shares (due to paying dividends). The following are some factors/theories that may make the dividend choice relevant:
- Bird in the hand theory
- Signaling
- Agency theory
- Taxation on ordinary income and taxation on capital gain
- Flotation costs of issuing new shares
- Brokerage charges on the purchase of common stock shares
Which of these factors/theories could be used to support the argument that a company”s management should pay dividends and obtain financing by issuing new shares? Be sure to explain why.