Academic journal article E+M Ekonomie a Management

The Position of Management of Czech Joint-Stock Companies on Dividend Policy

Academic journal article E+M Ekonomie a Management

The Position of Management of Czech Joint-Stock Companies on Dividend Policy

Article excerpt


The concept of distributing economic results belongs unequivocally among the basic financial decisions of management. Dividend payout to shareholders can be considered to be dividing profits while fulfilling legal conditions. For many shareholders, the payment of dividends is an important part of their investment decisions. Dividend policy can be defined as determining the method which provides the basis for whether profits will be withheld, shared or used for other purposes. Financial management must implement dividend policy in accordance with other financial decisions, i.e., primarily with investment (how and in to which activities to invest resources) and financial (what sources to use to finance their activities) decisions. From the perspective of financial theory, dividend policy is usually considered against the backdrop of the company's original goal, which is--according to current financial economics--maximizing the firm's market value. In 1961, economists [27] published a theoretical article with the title: "Dividend Policy, Growth and the Valuation of Shares," which is still one of the most discussed controversies in financial theory. The authors of this article submitted scientific evidence about the fact that a shareholder or potential investor is irrelevant to the company's dividend policy, because this does not influence firm value. In other words, receiving dividends or withholding and reinvesting company profit is considered mutually interchangeable. According to this theory, if the profit is reinvested, the firm's market value increases to the level that the investor would receive in the case of sale of shares plus the equivalent amount of unpaid dividends. Their article was a genuine breakthrough, because, at that point, most economists believed that the appropriate dividend policy would influence the firm's market value. According to the authors, the one determinant which does influence the firm's market value is the firm's investment options, therefore, not the dividend amount. The company should accept only projects with positive net present value when accepting such projects leads to maximizing the firm's market value. This theory is founded on the presumption of the existence of a perfect capital market; according to critics of the theory, this does not exist, because the world is full of market imperfections. Another premise is the existence of absolute certainty when decision-making concerning economic entities and the rational behavior of all participants of the financial market in the case that everyone has access to the same informational content and zero transaction costs. Despite these relatively strong and unrealistic preliminary requirements, it emerges from the authors' work that the dividend does not raise firm value by itself, but only implicitly through the market's imperfections.

A significant reason why companies pay dividends is the existence of the principal-agent theory. To a certain degree, dividend payout can reduce conflicts that can arise on account of the differing interests of individual parties during the administration and management of the company.

Asymmetrical information is one cause of the market mechanism's failure. The actual market does not evaluate known and certain values, but evaluates the prospective trend of a company's current and future yields. When it is assumed that managers have more timely information about the company's actual value and potential, dividend payments carry information about the company's future profitability.

Another significant characteristic that influences individual companies' dividend policy is taxes. More or less, different countries have different tax systems, which categorize capital and dividend yields into frequently differing tax groups; for example, there may be high rates of implemented tax dependent on the investor's income.

The firm life-cycle theory of dividends explains how companies adapt payout ratio dependent on their own development when, on one hand, the costs drop for acquiring borrowed capital, and, on the other hand, agency costs are incurred. …

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