1. Chapter 19 -- Dividend Policy and Investment Decisions u Miller and Modigliani (M&M) Hypothesis u Assumptions u no taxes, transaction costs, or brokerage fees u no flotation cost u information is free and available to all u Conclusion: in a perfect capital market dividend policy does not matter

2. Transaction costs u Brokerage fees must be paid by the shareholders to reinvest dividends u There could be an information cost to reinvesting dividends u Some companies use dividend reinvestment plans to eliminate brokerage fees u The presence of transaction costs decreases the desire for the company to pay dividends

3. Flotation costs u Floatation cost is the cost of issuing new debt or equity to replace money paid out in the form of dividends u The presence of flotation cost would decrease the desire to pay dividends

4. Taxes u Dividends proceeds are taxed at ordinary income or special dividend rates u Share repurchases are taxed at capital gains rates u Clientele effects may mitigate some taxes for a small clientele

5. Portfolio Considerations u High tax paying individuals may not hold stock in dividend-paying companies u Some pension plans have dividend requirements for the stock to be held in their portfolios u Taken together portfolio considerations are probably not very influential on dividend policy

6. Information Signaling u Paying dividends may signal expectations of increasing future cash flows u Actions speak louder than words u False signals are too costly u Information signaling has a significant influence on dividend policy

7. Agency Costs u An increase in dividends increases the agency cost of debt u Dividends take money out of the company that would otherwise serve as a safety margin for creditors u Dividends decrease the agency cost of equity u Dividends take money out of the company that might otherwise serve as a safety margin for managers or be consumed frivolously by managers

8. Firm-specific Variables u Investment opportunities u Institutional restrictions u Legal requirements u Restrictive covenants u Income rules u Improperly accumulation earnings tax u Cash flow u Management interest

9. Firm-specific Variables u Management interest u Control u Takeover defense u Management attitudes toward risk u Management growth preference

10. Common Policies u Constant dollar policy u Constant pay-out ratio policy u Constant dollar plus extras u Residual policy u Constant dollar with increases each year u For those companies paying dividend this appears to be the most popular -- easier for the analyst to project

11. Stock Dividends u You receive, for example, 5 additional shares for each hundred shares you held u If you owned 1% of the company before, you own 1% after the stock dividend u Stock dividends simply divide ownership into smaller pieces u May signal future dividend plans

12. Stock Repurchases u Alternative to dividends for distributing money to shareholders u Taxed at capital gains rate u Voluntary, not mandatory u Positive signal u May not create expectation