Question

Using signal theory, explain how and why the geographic location of a public company is important to its dividend policy.

Answer 1

According to signalling theory the increase in dividend payout ratio shows the future growth or future prospect of the firm.

Geographical location of a firm have greater impact on dividend payout ratio. If firm is located in a remote area it will rely on regular dividend payout because the shareholders will have to bear high risk in the aspect of investment decision. And it will eradicate the problem of flow of cash within the organisation they make sure dividend cut and increase the dividend in order to face the cash flow problem. Hence remote firms offer higher and regular dividend.

A public company usually follows fixed dividend schedule but sometimes it offers special dividend other than fixed dividend payment.