15: Payout PolicyST15-1 What do record date, ex-dividend date, and payment date mean in relation to dividends? Why
would you expect the price of a share to drop by the amount of the dividend on the ex-dividend
date? What rationale has been offered for why this may not actually occur?
ST15-2 What does it mean to say that corporate managers ‘smooth’ cash dividend payments? Why do
managers do this?
ST15-3 What are the key assumptions and predictions of the signalling model of dividends? Are these
predictions supported by empirical research findings?
ST15-4 What is the expected relationship between dividend payout levels and the growth rate and
availability of positive-NPV projects, under the agency cost model of dividends? What about
the expected relationship between dividend payout and the diverseness of the company’s
shareholders? Consider a company, such as Microsoft, awash in excess cash flow and available
positive-NPV projects, and having a relatively diverse shareholder base in an industry with
increasing competition. Does either the agency model or the signalling model adequately predict
the dividend policy of Microsoft? Which does the better job?
QUESTIONS
Q15-1 What is a company’s dividend yield?
How does it compare to that company’s
dividend payout ratio?
Q15-2 Compare and contrast the following
dividend policies: the constant payout
ratio dividend policy and the constant
dollar payout dividend policy. Which
policy do most public companies actually
follow? Why?
Q15-3 What is a low-regular and extra payout
policy? Why do companies pursuing this
policy explicitly label some cash dividend
payments as ‘extra’?
Q15-4 What is a bonus share issue? How does
this differ from a share split?
Q15-5 What factors have contributed to the
growth in share repurchase programs?
Q15-6 What is the average share-market reaction
to: (a) a dividend initiation; (b) a dividend
increase; (c) a dividend termination;
and (d) a dividend decrease? Are these
reactions logically consistent?
Q15-7 What are the key assumptions and
predictions of the agency cost/contracting
model of dividend payments? Are these
predictions supported by research
findings?Q15-8 Around the world, utilities generally
have the highest dividend payouts of
any industry, yet they also tend to have
massive investment programs, which they
finance using external sources. How do
you reconcile high payouts and large-
scale security issuance?
Q15-9 Why do companies with diverse
shareholder bases typically pay higher
dividends than private companies or
public companies with concentrated
ownership structures? How are
fixed dividends used as a bonding
(commitment) mechanism by managers
of companies with dispersed ownership
structures and large amounts of excess
cash flow?
Q15-10 How is the residual theory of dividends
used to explain observed dividend
payments? How is this theory in conflict
with evidence suggesting that corporate
managers smooth dividends?