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What do you understand by ‘the dividend puzzle’? Compare and contrast ‘traditional’ and ‘modern’ theories of...

What do you understand by ‘the dividend puzzle’? Compare and contrast ‘traditional’ and ‘modern’ theories of dividend policy.

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Dividend Puzzle is a theory where the investors are rewarded by corporate dividend payments. This do not exist in perfect capital markets. Dividend taxation will be twice over the benefits to the investors. Most firms pay dividends although the tax disadvantage, this is what is called as Dividend Puzzle.

Dividend pays have been there since three hundred years and continued still by the companies. We have two theories as in Modern and Traditional, in Traditional you'd get to see usage of Traditional Approach and Modigilani Approach. Modern theories include Walter and Gordon theories. Gordon theory explains how retentions influence over the stock price and could have the capacity to maximize the wealth of the shareholders. Traditional theory explains there exists no tax, the markets are perfect and people make rational investment decisions But in modern theory, the tax is double sided. Comparatively, both the theories make a goal to maximize shareholder's wealth.

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