Relationship Between Dividend Policy and Firm Value
Autor: Rosmira Farzana • January 10, 2016 • Thesis • 699 Words (3 Pages) • 1,161 Views
7.0 Conclusion.
In conclusion, this study looked at the fact of whether dividend policy affects firm value or not. To determine the validity of such theory 3 companies from the list in Bursa Malaysia were chosen, which are Genting Plantation, United Plantation and Sarawak Plantation. The relationship between dividend policy and firm value is confirmed by using simple regression method from Year 2005 (Sarawak Plantation started in Year 2006) to Year 2014.
7.1 Relationship between Dividend Policy and Firm Value.
By the result of the study conducted, it showed that dividend policy has a significant negative relationship with two out of three measurements of dividend policy, which are the dividend payout and dividend yield. The third measurement of dividend policy, dividend per share shows no relationship that will affects firm value. As said in literature review, dividend policy can affect firm value as it is the rule that decide on the amount to pay to the shareholders. Three theories that is related to dividend policy is chosen for comparison which are Bird- in Hand Theory, Tax Preference Theory and MM Irrelevance Dividend Theory.
7.2 Comparison of Results of Study with Theories.
The results of the study are consistent with the Bird-in the Hand Theory by Myron Gordon (1963) and John Lintner (1962) which stated that higher dividend payout will result in higher firm value. They suggested that investors prefer the dividend rather than capital gain. The same with Tax Preference Theory in which, Litzenberger and Ramaswamy (1979) stated that investors prefer lower payout to avoid tax payment.
However, the theory of MM Irrelevance Dividend Theory, Modigliani and Miller (1961) is not consistent with the result of study as they stated that dividend policy does not affect firm value. The essential negative relationship of two measurement of dividend policy (dividend payout and dividend yield) with firm value indicate otherwise. Furthermore, the theory stated is made on unrealistic assumption such occurring no tax, which rarely happened.
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