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Impact of Dividend Policy on Share Price

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Nowadays, the business firm relates the dividend policy with the product life cycle (PLC). For an example, a firm with large cash flow, high growth rate and lower trends in project appraisal tries to pay more dividends to the shareholder, as the earnings of the firm are comparatively high. The firms with high growth rate follow different interesting patterns in order to change the pattern of such decisions and enhance the complexity (Lease, 56). Dividends totally depend on earnings of the business firm. If the earnings of business firms are increased, then the dividend should increase too.

On the other side, the dividend cut denotes the decreasing trend of earnings. It is very essential to understand the situation, how the dividend payout policy affects the share price. Moreover, it will help to recognize the influence of dividend payout policy on share prices. The literature review starts with generalizing the overall scenario which called perfect capital market assumptions are as follows. Miller and Modigliani (MM) first introduced the contradiction of dividend announcement whether it effects on the share price or not. The augmentation of payout from the dividend needs to be combined with the increase of business growth according to the dividend discount model.

An alternative Miller Modigliani model suggests that the dividend decisions do not have any impact on the value of the company and similarly it does not have the impact on share prices. It is obvious that the company valuation is assessed from the market capitalization. The effects of taxes are the most important challenge to the ‘ dividend irrelevance’ introduced by MM. MM mainly focused on the drawbacks of tax on dividend relative capital gain.

Moreover, tax on the dividend is more than the tax on capital gain, which affects the fiscal policy. This case also influences the partialities of the tax-paying investors. The average tax paying investors can hold a well-diversified portfolio (Balanced portfolio) of high yield and low yield shares that offer the same facilities on the rate of return after tax.

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