Analysis: The Irrelevance Dividend Policy Argument?

According to M-M (1961), the irrelevance dividend policy argument was based on two basic assumptions i)Perfectcapital marketand ii)Rationalinvestors. In theperfectcapital market,alltradershave equaland perfect information about the current share price and all other relevant characteristic of shares. In this perfectcapital markets thereareno transaction fees, breakage fees,taxes and other cost. Second, perfectly rational investor’s preferences are indifferent as to whether a given increment to their wealth is in the formofcash(dividendincome)or gaininmarket priceoftheshare(capitalgains). Thirdly they basetheir argument on the idea of perfect certainty, which indicates complete assurance on the part of every investor as to future investment decisions of the firm and the future profits of every corporation. Because of this assurance, there is no need to distinguish between equity share and debenture as a source of finance[7].

Relevance of Dividend Policy:

Lintner (1956) in his study argued in favor of relevancy of dividend policy as the dividend are the relevant factors to determine the value of the firm. Gordon(1962) use dividends as the method of valuation for corporation which put an emphasis on the importance of dividend while doing valuation of corporation. For behavioral

Modigliani Miller Hypothesis assumed that there is symmetry of information that the the information is available to everyone but the managers have more information than the outsiders (Robinson, 2006). The presence of asymmetric information the use of dividends can be viewed as signal which gives the information to the investors about the future performance of the firm. The signaling hypothesis argue that the signaling hypothesis argues that the dividend payments are the furure profitability signals of the firm. Signaling hypothesis is supported by many researchers ( Priya, Mohansanduri,