Question

Clientele effect, tax differential, agency cost and information asymmetries affect the dividend value perceived by investors".

Express your views on this statement. Justify your answer citing appropriate examples from Suadi Firms.

Answer 1

Clientele effect- basically movement in a company’s stock price according to the demands and goaks of Investor. This effect calculated based on dividend paying securities , high growth stocks blue chip stock . it also focused on how a specific company conducts its dividend policy

In general , high growth stocks traditionally do not pay dividends, they are more likely increase price .Where as dividend paying stock show smaller gain in Capital gains but rewards Investor with stable , periodic growth .

tax differential and impact on Dividend Income :

The shareholders prefer Equity Appreciation to dividend mainly because capital gain are effectively taxed at lower rate than dividends when the Investment factors are considered .Dividend payments are set rather than variable

Dividend are taxed every year while capital gains are not taxed until stocks are sold out ,

Dividend payouts are a sure things while company growth is unpredictable . Dividend pay out can actually increase a company’s share value , this is regular flow of Income

Agency cost – impact on Dividend Policy :

Agency cost mainly is a internal cost which arises between management ( act as Agent) and shareholders ( act as principal) because if their different interest view . Dividend payment are often employed to mitigate Agency cost

Agency cost are viewed as the sum of monitoring cost by the principal , the bonding expenditure by the agent along with residual loss . there always some conflict of interest between Agent and Principal . In a due course insider ownership gets more and more the agency cost became less as there increase in connection between insiders and owners and therefore dividend payout came as a tool t reducing Agency cost.

information asymmetries and impact on Dividend :

We observed that firms that are more subject to information asymmetries are less likely to pay , initiate or increase dividends and disburse smaller amount .