Dividend policy as determinant for investment decision

Abstract

A company‘s dividend policy is the choices the company makes about whether to pay shareholders cash dividend, about how large the cash dividend should be and about how frequently it should be distributed. Dividend policy still remains one of the most vital financial decisions faced by management of corporate organization such insurance firms.  Allen, Bernardo and Welch (2000) summarized the current consensus view when they concluded that “Although a number of theories have been put forward in the literature to explain their persistent presence, dividends remain one of the thorniest puzzles in corporate finance”.  Organizations is always confronted with the decision on how much of the net earnings are to be distributed and how much of the dividend should be reinvested.  Dividend payment directly affects shareholders wealth maximization therefore it is extremely an important issue for every company in a vital decision making. It encompasses decision such as whether to distribute cash to investors in form of share repurchases or specially designated dividends rather than regular dividends, and whether to rely on stock or cash distribution.  Dividend policy is the guiding principle that a company uses to decide to make dividend payment to shareholders.  The decision to increase the company’s regular dividend still lies on the management.