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- Title
Why Do Companies Pay Dividends?
- Authors
Feldstein, Martin; Green, Jerry
- Abstract
The article focuses on the prevailing ratio of dividends to retained earnings. there is the desire on the part of small investors, fiduciaries, and nonprofit organizations for a steady stream of dividends with which to finance consumption. It is argued that small investors might have substantial transaction costs and that some fiduciaries and nonprofit organizations are required to spend only "income" and not "principal." Management selects a dividend policy to communicate the level and growth of real income because conventional accounting reports are inadequate guides to current income and future prospects. Closely related to the signaling idea is the notion that shareholders distrust the management and fear that retained earnings will be wasted in poor investments, higher management compensation, etc. This preference is strong enough to pressure management to make dividend payments even when this involves a tax penalty. Each firm is constrained by the fact that more rapid growth would increase its relative size, thereby making it riskier and reducing the market price of its securities.
- Subjects
DIVIDENDS; BUSINESS enterprises; RETAINED earnings; CORPORATE profits; CORPORATE finance; EARNINGS per share; REINVESTMENT
- Publication
American Economic Review, 1983, Vol 73, Issue 1, p17
- ISSN
0002-8282
- Publication type
Article