Dividend puzzle - Wikipedia
Jump to content
Search
Search
Donate
Create account
Log in
Personal tools
Donate
Create account
Log in
Dividend puzzle
3 languages
Azərbaycanca<br>Հայերեն<br>Bahasa Indonesia
Edit links
From Wikipedia, the free encyclopedia
Why firms pay dividends despite theories predicting investor indifference
The dividend puzzle , as originally framed by Fischer Black,<br>[1]<br>relates to two interrelated questions in corporate finance and financial economics:<br>why do corporations pay dividends; and why do investors "pay attention" to dividends?
A key observation here, is that companies that pay dividends are rewarded by investors with higher valuations (in fact, there are several dividend valuation models; see The Theory of Investment Value). What is puzzling, however, is that it should not matter to investors whether a firm pays dividends or not:[2] as an owner of the firm, the investor should be indifferent as to receiving dividends or having these re-invested in the business; see Modigliani–Miller theorem. A further and related observation is that these dividends attract a higher tax rate as compared, e.g., to capital gains from the firm repurchasing shares as an alternative payout policy.<br>For other considerations, see dividend policy and Pecking order theory.
A range of explanations is provided.[3][2]
The long-term holders of these stocks are typically institutional investors. These (often) have a need for the liquidity provided by dividends; further, many, such as pension funds, are tax-exempt. (See Clientele effect.)
From the signalling perspective,[4] cash dividends are "a useful device" to convey insider information about corporate performance to outsiders, and thereby reduce information asymmetry; see Dividend signaling hypothesis.
Behavioral economics posits that for investors, outcomes received with certainty are overweighed relative to uncertain outcomes; see Prospect theory. Thus here, respectively, investors will prefer (and pay for) certain cash dividends, as opposed to reinvestment in the firm with possible consequent price appreciation.
Under Agency theory,[5] dividend policy is seen as a way to mitigate the principal–agent problem: by paying out a portion of free cash flow as dividends, shareholders (principals) can limit the actions available to managers (agents, who might otherwise engage, e.g., in "empire building").[6]
References<br>[edit]
↑ Fischer Black (1976). "The dividend puzzle," The Journal of Portfolio Management, 1976.2.2:5-8.
1 2 George M. Frankfurter (1999). "What is the Puzzle in “The Dividend Puzzle?,", The Journal of Investing, 8(2):76-85.
↑ Kwok-Chiu Lam (2014). "The Dividend Puzzle: A Summary Review of Explanations," Journal of Finance and Investment Analysis, vol. 3, no.4, 2014, 31-37.
↑ Erhan Kilincarslan (2022). "Demystifying the ‘dividend puzzle’ and making sense of government regulations in times of pandemics," lse.ac.uk
↑ Staff (2025). Dividend Irrelevance: Agency Theory and the Principal Agent Relationship. fastercapital.com
↑ Jensen, Michael C. (1986). "Agency costs of free cash flow, corporate finance, and takeovers". American Economic Review, 1986, vol. 76, issue 2, 323-29
Retrieved from "https://en.wikipedia.org/w/index.php?title=Dividend_puzzle&oldid=1333106110"
Categories: Dividends<br>Valuation (finance)<br>Economic puzzles<br>Corporate finance<br>Financial economics
Hidden categories: Articles with short description<br>Short description matches Wikidata
Search
Search
Dividend puzzle
3 languages
Add topic