Share Holder Value Is Irrelevant – Justify
SHARE HOLDER VALUE IS IRRELEVANT. JUSTIFY.
Since, dividends are taxed more heavily, it is more advantageous to transmute dividends into capital gains
Taxes on dividends have to be paid immediately whereas capital gains tax can be deferred until shares are actually sold.
An individual cannot ‘costlessly’ adjust her dividend pattern to fit her preferred consumption pattern. Therefore shareholders may prefer companies to supply them with their desired dividend pattern thereby creating a certain demand for specific patterns.
Investors are attracted to different company policies, and when the company policy changes, investors will adjust their stock holdings accordingly. As a result of this adjustment, the stock price will move. Unfortunately, this may mean that the shareholders may incur costs of adjustment.
At the same time, the company may incur consequential costs in the form of missed investment opportunities or costs of raising finance due to free cash flow shortage.
Growth companies normally pay lower dividends and reinvest more of their free cash flows in new projects and expansion, thus providing higher capital appreciation. These companies attract investors in the high tax brackets with no pressing needs for cash.
There is no effect from dividends on a companys capital structure or stock price.
As per “dividend irrelevance hypothesis “investors can affect their return on a stock regardless of the stocks dividend. The dividend is irrelevant to investors, meaning investors care little about a companys dividend policy since they can simulate their own.
It makes little difference to investors whether dividends are paid or not as investors they can reproduce the cash flows of different dividend policies. For example, if a company