maychoose tokeeptheexcesscashtofinancethesefuture
needs.Thus,tothedegreethatafirmmaybeunsureaboutits
futurefinancingneeds,itmaychoosetoretainsomecashto
take on unexpected investments or meet unanticipated needs.
3.Taxfactors.Until2003,dividendsweretaxedatahigher
taxratethancapitalgains.Consequently,firmschosetoretain
excesscashandpayoutmuchlessindividendsthantheyhad
available.Thiswasaccentuatedifthestockholdersinthefirm
were in high tax brackets, as was the case with many
family-controlledfirms.If,however,investorsinthefirmlike
dividendsortaxlawsfavordividends,thefirmmaypaymore
out in dividends than it has available in FCFE, often
borrowing or issuing new stock to do so.
- Signaling prerogatives. Firms often use dividends as
signalsoffutureprospects,withincreasesindividendsbeing
viewedaspositivesignalsanddecreasesasnegativesignals.
Theempiricalevidenceisconsistentwiththissignalingstory,
sincestockpricesgenerallygoupondividendincreases,and
downondividenddecreases.Theuseofdividendsassignals
may lead to differences between dividends and FCFE.
5.Managerialself-interest.Themanagersofafirmmaygain
byretainingcashratherthanpayingitoutasadividend.The
desireforempire buildingmaymakeincreasingthesizeof
thefirmanobjectiveonitsown.Ormanagementmayfeelthe
needtobuildupa cashcushion totide overperiods when
earnings may dip; in such periods, the cash cushion may
reduceorobscuretheearningsdropandmayallowmanagers
to remain in control.