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Dividend policy determines the ratio between the earnings distributed to shareholders and the earnings retained in the company. Even though retained earnings are one of the most important funding sources used for financing corporate growth, the accrued dividends represent stakeholders' cash flows. Should the cash be reinvested in business operations or should it be paid out to investors in equity? The decision might seem simple, but it provokes a surprising number of controversies. Despite thorough theoretical and empirical analyses aimed to explain their omnipresence, dividends remain one of the biggest puzzles in corporate finances.
This paper starts by determining the term of dividend and stating the types of dividends. This is followed by a discussion on dividend policy and optimal dividend policy and an analysis of factors that managers should have in mind when forming dividend policy. Considerable attention is given to the leading dividend theories which try to answer the question about the role of dividends in maximizing the value of a corporation, as well as to practical instructions offered to managers in an attempt to achieve this goal. Other related issues are also discussed, such as dividend reinvestment plans, stock dividends, and share repurchase. Finally, two surveys are presented. The aim of conducting the surveys was to determine the attitudes of managers on dividend policy and to identify factors which the managers viewed as decisive when establishing a concrete dividend policy.
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