Examine the view that dividends are irrelevant to rational investors Assignment

Examine the view that dividends are irrelevant to rational investors when considering the value of shares from a theoretical and empirical perspective - Assignment Example Primarily, when firms make enormous profits, the managers can either decide to use it for expansion by investing in new projects or pay it to the shareholders in the form of dividends. The dividend policy usually guides this process. Dividend policy is the set of guidelines or principles that companies adopt to decide the amount of the profits that shareholders are to receive (Miller and Modigliani, 1961). Even though, the business uses these sets of principles to determine the value of the dividend the decision on whether to pay the dividends or not lies in the board’s decision. In fact, when the board of directors declares the dividends to be paid it becomes a debt to the corporation and cannot be recanted or rescinded quickly. Dividends can either be paid on temporary or permanent basis or sometimes it can be paid once or twice a year. Deangelo (1995) argues that, investors are usually interested not only in the stability of this payment but also the level of dividend payment. From this perspective, therefore, the managers should be aware of the impacts of unexpected changes in the dividend payment to the potential investors. Both the existing investors and potential investors are affected by the changes since such uncertainties could alienate them from investing with the organization. According to Bhattacharya (1979), unstable dividend payment aspect may negatively influence the perception of the investor based on the long term company’s performance in the financial markets. Even though, most economists believe that it is the value and stability of payment of dividends that the investors should rely on while making decisions; research ascertains that this is irrelevant and should warrants sidelining. Many from other schools of thought including Miller and Modigliani believe that what the company pays in the form of a dividend is totally