Page 295 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Dividend policy

1.3 Dividend relevance

Practical influences on dividend policy:

 Dividend signalling (reductions in dividends can convey ‘bad news’ to
shareholders who aren’t fully informed about why the dividend has been cut (a
market imperfection))

 Investor liquidity requirements (a cut in a dividend or an unexpected dividend
may conflict with investors’ liquidity requirements)

 Clientele effect (investors may have invested for a specific reason such as tax
planning. As income tax and capital gains tax are taxed differently, a dividend
policy change can affect the taxes incurred by investors)

As a result companies tend to adopt a stable dividend policy and keep shareholders
informed of any changes.

287