Financial Factors Affect Dividend Policy Food Beverage Malaysia Finance Essay - Free Essay Example

When a company earns a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it distribute to its shareholders as a dividend. Dividend is the share of the after-tax profit of a firm, distributed to the shareholders of a corporation pro rata based on the number of shares and class of shares held by the shareholders (McLaney, USER2010-07-12T12:24:00 Business finance (textbook)2005a). Most of the corporations usually issued the dividends in cash but it may be issued in the form of stocks or property. The distribution of profit as cash dividends to shareholders reduces the amount of cash available to the business. However, companies which pay stock dividends will increase the additional stock shares held by shareholders. Smaller firms distributed dividend usually at the end of an accounting year, whereas larger such as publicly held firms usually distribute it every quarter (Anon, 2010USER2010-07-12T12:23:00 https://www.businessdictionary.com/definition/dividend.html). The amount of the dividend is determined every year at the companys annual general meeting, and declared as either a cash amount or a percentage of the companys profit. Further, the amount and timing of the dividend is decided by the board of directors, who also determine whether it is paid out of current earnings or the accumulated earnings (McLaney, 2005b)USER2010-07-12T12:25:00 Business finance (textbook) . The shareholders who held preference shares are receive dividend at a fixed rate and are paid first. Holders of ordinary shares are entitled to receive any amount of dividend, based on the level of profit and the firms need for cash for expansion or other purposes (Elliott, 2005USER2010-07-12T12:18:00 Financial accounting n reporting (textbook)). Corporate legislation generally forbids payment of dividend out of anticipated but not yet received profit or unrealized profit. 2.1.1 Type of dividend payment In distributing its wealth to shareholders, a firm must decide what type of dividend should pay to their shareholders. The different types of dividends payment include: Cash dividend Cash dividend involves a cash payment from a firm pay out their earnings to the firms shareholder (Levy, 1998USER2010-07-13T15:18:00 Corporate finance, textbook). This kind of dividends is most commonly paid in cash through a check or electronic funds transfer. Cash dividends give shareholders flexibility to choose how to use the money, including reinvestment if the company allows (Dawn, 2010USER2010-07-13T15:18:00 https://www.ehow.com/facts_5778738_stock-dividends-vs_-cash-dividends.html). Cash dividends considered a type of investment earnings, and are taxable (Maps of World Finance, 2009USER2010-07-13T15:19:00 https://finance.mapsofworld.com/dividend/definition.html). Generally, cash dividends are paid out of the profits earned by the firms during the period cited, although it is possible for a cash dividend to be paid even when there is no net profit for the fiscal period under consideration (Tatum, 2010USER2010-07-13T15:19:00 https://www.wisegeek.com/what-is-a-cash-dividend.htm). Scrip dividend Scrip dividend is provisional certificate issued at the option of individual shareholders by a company strapped for cash but having adequate retained earnings. This scrip dividend is a scrip issue made in lieu of a cash dividend. Generally, scrip dividend is an unusual type of dividend involving the distribution of promissory notes that call for some type of payment at a future date. It also called liability dividend. Stock dividend A stock dividend does not involve cash. A stock dividend is a dividend that is paid in shares of the companys stock. Normally, the shareholders of a company are offered on the basis of a prorate allotment (Maps of World Finance, 2009USER2010-07-14T11:39:00 https://finance.mapsofworld.com/dividend/definition.html). Those stock dividends provide the shareholders with additional share ownership in the company. Therefore, in generally, the shareholders will reinvest the share in the company at the current share price as of a predetermined closing date (Dawn, 2010aUSER2010-07-14T11:39:00 https://www.ehow.com/facts_5778738_stock-dividends-vs_-cash-dividends.html). The purpose of a company chooses to issue stock dividends in order to generate more interest and trading activity with the stock (Dawn, 2010b). Property dividend Property dividend is a type of dividend paid to shareholders in anything other than cash or with the companys own stock (Farlex, 2009aUSER2010-07-14T22:08:00 https://financial-dictionary.thefreedictionary.com/Property+Dividend). A property dividend generally is distributed in the form of physical assets in lieu of the cash by the issuing company or a subsidiary company (Tatum, 2010USER2010-07-14T22:08:00 https://www.wisegeek.com/what-is-a-property-dividend.htm). Commonly, property dividends include shipping the companys product to shareholders (Farlex, 2009b). As a result, shareholders will receive any number of physical assets instead of money (Financial web, 2010USER2010-07-14T22:09:00 https://www.finweb.com/investing/what-is-a-property-dividend.html). A property dividend is attributable to its face value in the market. The distributing of assets by the firms instead of cash allow shareholders to benefit directly from the market value of the dividend received (Anon, 2010USER2010-07-14T22:09:00 https://www.beginnermoneyinvesting.com/html/property_dividends.htm). In general, a property dividend is taxable at its fair market value (David, 2003USER2010-07-14T22:09:00 https://financial-dictionary.thefreedictionary.com/Property+Dividend). 2.1.2 Payment procedures of dividend A firm announces and schedules dividend payment as follow: Thursday, Wednesday, Friday, Monday, March March March April 15 28 30 16 Declaration Ex-dividend Record Payment Date date date date Figure 3: Example of the procedure for dividend payment Declaration date. The date on which the board of directors meets and declares the terms and timing of dividend payment. Ex-dividend date. The final stock trading date for entitlement to the dividend. This date is four business days before the holder record date. Holder record date. The date on which the firm compiles a list of all current shareholders entitled to dividends. Payment date. The date on which the firm mails the dividend by check to the shareholders listed on the holder record date. 2.2 Studies on dividend policy Nowadays, dividend policy is an important subject in corporate finance, and dividends are a major cash outlay for many corporations. At first glance, it may seem obvious that a firm would always want to give as much as possible back to its shareholders by paying dividend (Jordan et al, 2001). USER2010-07-23T10:59:00 Essentials of corporate financeIn establishing its policy, a firm must decide its dividend policy strategy and level of dividend such as the amount of the dividend. These two decisions together comprise the companys dividend policy (Levy, 1998USER2010-07-18T16:30:00 Corporate finance, textbook). Dividend policy is one type determination of the division of earnings between payment to shareholders and reinvestment in the corporation. The task of a firms manager is to allocate the earnings to dividends or retained earnings. Retained earnings are one of the most significant sources of funds for financing corporate growth. Corporate growth makes it eventually possibly to get more dividends.USER2010-07-28T08:45:00 Act info get from dividend puzzle a review of dividend theories (NEED TO FIND OTHER REFERENCE) In fact, dividend policy is the regulations and guidelines for firms to develop and implement as the means of arranging to make dividend payments to shareholders (Tatum, 2010USER2010-07-18T16:31:00 https://www.wisegeek.com/what-is-a-dividend-policy.htm). Dividend policy is also mean that the trade-off between retained earnings and paying out cash or issuing new share to shareholders. The dividend policy of a firm describes that the firms plan regarding both the amount and timing of dividends (Czelusta, 2010USER2010-07-18T16:31:00 https://www.ehow.com/about_6541106_nominal-dividend-policy.html). Establishing a specific dividend policy is to the advantages of both the firm and the shareholder. 2.2.1 Type of dividend distribution policy Regardless of a firms long-term dividend policy, most firms choose one of several year-to-year dividend payment patterns as below: Constant dividend payout ratio In this policy, there is a fixed percentage of earnings paid out in dividends is held constant every year. Then, the rest of retained earnings will reinvests by the company. Although the dividend-to-earnings ratio is stable, but earnings of a company usually fluctuate every year; therefore, the amount of the dividend naturally fluctuates from year to year as profit vary (Martin et al, 1999USER2010-07-18T18:35:00 Basic financial management). Constant dollar dividend per share This policy maintains a constant-dollar dividend per share over time; say $6 per share, regardless of the companys earnings. An increase in the dollar dividend usually does not occur until management is convinced that the higher dividend level can be maintained in the future. However, some companies may increase the dividend slightly every year to compensate for inflation. This kind of policy still called a constant-dollar dividend policy. Further, management of a firm also will not reduce the dollar dividend until the evidence clearly show that a continuation of the present dividend cannot be supported (Levy, 1998USER2010-07-18T18:35:00 Corporate finance, textbook). Low regular dividend plus extras Corporations that in adopting this policy are require paying a small regular dollar dividends plus a year-end extra dividend in prosperous years. The extra dividend is declared toward the end of the fiscal year when the firms performance or profit for the period can be estimated. The objective of a firm chooses this type of dividend policy is to avoid the connotation of a permanent dividend. However, this purpose may be defeated if recurring extra dividends come to be expected by investors (Brigham, 1995USER2010-07-18T19:10:00 Fundamental of financial management). 2.3 Studies on dividend policy theory In the world of finance, there are some areas which have puzzled researches. One of them is the dividend behaviour of a corporation. Dividend policy has been one of the first areas of corporate finance to be analyzed with a rigorous model. Besides, this dividend policy topic has been one of the most thoroughly researched issues in modern finance (Kinkki, 2001USER2010-10-31T21:41:00 Dividend puzzle a review of dividend policy theory). In fact, the topic of dividend policy also is one of the most enduring issues in modern corporate finance. This has led to the emergence of a number of competing theoretical explanations for dividend policy. No consensus has emerged about the rival theoretical approaches to dividend policy despite several decades of research (Al-Malkawi, 2007USER2010-10-31T21:41:00 Determinants of corporate policy in Jordan). However, at the same time, there is no generally accepted model describing the dividend payout policy. Moreover, empirical findings are often contradictory to interpret according to the theory (Stacescu, 2004USER2010-10-31T21:41:00 Dividend policy in switzerland). In this paper, there are some behavioral and economical theories mainly for used to explain the motives and determinants of dividend policy. The dividend literature proposes numerous theories such as dividend irrelevance theory, bird-in-the-hand theory, tax preference theory, signaling as well as clientele effects. 2.3.1 Dividend irrelevance theory The dividend irrelevance theory has been argued that dividend policy has no effect on either the price of a firms stock or its cost of capital. The principal proponents of the dividend irrelevance theory are Merton Miller and Franco Modigliani (1961). The dividend irrelevance theory by Modigliani-Miller (MM) is the basis for the theory indicating that investors are financially unaffected by a corporations decision to reinvest the earnings on distributes them as dividends to their shareholders (Kania Bacon, 2005USER2010-10-31T21:41:00 What factors motivate the corporate dividend decision). According to MM theory, the value of the firm is the determined only by its basic earning power and its business risk. Further, MM also argued that the value of the firm depends only on the income produced by its assets, but not on how this income is split between dividends and retained earnings (Brigham, 1995USER2010-10-31T21:41:00 Fundamentals of financial management (textbook)). Al-Kuwari (2009USER2010-10-31T21:41:00 Determinants of the dividend policy in emerging stock exchange: GCC countries) and Azzopardi (2004USER2010-10-31T21:41:00 Dividend irrelevance and clientele effetcs) states that, there are some basic assumptions of MM approach: There exists perfect capital market where all investors are rational. Information is available to all at no cost. Besides, there are also no transactions costs and floatation costs. There are no such investors as could alone influence market value of shares. There is absence of taxes. Alternatively, there is no tax differential between income on dividend and capital gains. Firm has uncertainty as to future investments and profits of the firm. Therefore, shareholders are able to predict future prices and dividend with certainty. Obviously, these assumptions do not hold in the real world. In reality, corporations and shareholders need to pay income taxes. Corporations do incur flotation costs as well as investors also do incur transactions costs. This both taxes and transactions costs may cause the cost of capital to be affected by dividend policy (Hickman et al, 2002USER2010-10-31T21:41:00 Foundations of corporate finance act info get from brigham (textbook)). 2.3.2 Bird-in-the-hand theory In a classic study, Gordan-Lintner (1956) showed that dividend-smoothing behaviour was widespread. Gordan-Lintner laid the foundation for the modern understanding of dividend policy (Harvey et al, 2004aUSER2010-10-31T21:41:00 Payout policy at 21st century). This theory also called bird-in-the-hand theory. Allen and Michaely (2002USER2010-10-31T21:41:00 Wharton payout policy) found that, Lintner started with over 600 listed companies and selected 28 to survey and interview. According to the Lintner, perceived stability of future earnings still effects dividend policy. However, based on past researches, Harvey et al (2004b) states that, the link between dividend and earnings has weakened after fifty years later. In their opinion, many managers are more tend to repurchase because firms are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase earnings per share. Bruner (1999USER2010-10-31T21:41:00 Case studies (Photostat) textbook (act get info fr Determinants of Corporate Dividend Policy in Jordan: An Application of the Tobit Model) states that, the bird-in-the-hand theory asserts that in a world of uncertainty and information asymmetry dividends are value differently to retained earnings or capital gains. The reason of uncertainty of future cash flow, shareholders will often tend to prefer dividends to retained earnings. As a result, higher payout ratio will reduce the required rate of return which is also called cost of capital, and hence increase the value of the firm. 2.3.3 Tax preference theory The tax preference theory refer to the low dividend payout ratios lower the required rate of return and thus increase the market valuation of a firms stock. Due to the relative tax advantages of dividend compared to capitals gains, shareholders require a higher before-tax risk adjusted return on stocks with higher dividend yields (Kalay Michaely, 2000USER2010-10-31T21:41:00 https://findarticles.com/p/articles/mi_m4130/is_2_29/ai_67720681/). Further, another distinct benefit exists in this tax preference theory is for capital gains vis-a-vis dividend income. Taxes on dividend income are paid when the dividend is received. At the same time, taxes on price appreciation are deferred until the stock is actually sold. Therefore, when it comes to tax consideration, most shareholders prefer the retention of a firms earnings as opposed to the payment of cash dividends. Majority of shareholders are subject to taxes, therefore, certain investment companies, trusts, and pension plans are exempt on their dividend income. This theory suggests that a policy of paying low dividend will result in a higher stock price. As a result, a high dividend does not benefit shareholders, whereas low dividends and high retention benefit the shareholders. This is the logic of advocates of the low-dividend policy. 2.3.4 Residual dividend theory Servaes and Tufano (2006USER2010-10-31T21:41:00 The Theory and Practice of Corporate Dividend and Share Repurchase Policy) note that, a residual distribution policy is one type of investment decisions make by a firm based on opportunities and available funds. If a firm does not have sufficient funds available to make investment, then one of the issues is consider accessing capital markets. Once a firm has excess funds and the manager do not believe that the funds will need in the near future, then the remainder of funds will distribute to shareholders. Investors should want the firm to retain any earnings it can invest at a rate of return that is at least as high as the shareholder opportunity cost. Firms that agree with this concept is following a residual dividend policy where dividends are paid only if earnings are greater than what is needed to finance the equity portion of the firms optimal capital budget for the year. Therefore, if the residual dividend policy is followed, the firms should not pay dividends when it is necessary to issue new common stock to provide equity financing for the current capital budgeting needs.USER2010-10-31T21:41:00 Find author get fr CAPITAL STRUCTURE AND DIVIDEND POLICY Those firm that wishes to avoid issue of shares, will have to rely on internally generated funds to finance new positive NPV projects. Under the concept of residual dividend policy, dividends can only be paid out of what is left over. When the firm treats dividend policy as strictly a financing decision, the payment of cash dividends is a passive residual. The amount of dividend payout will fluctuate from period to period in keeping with fluctuations in the number of acceptance investment opportunities available to the firm. If those investment opportunities abound, then there will be zero percentage of dividend payout. However, on the other hand, when the firm is unable to find profitable investment opportunities, dividend payout will be 100%.USER2010-10-31T21:41:00 Find author get fr dividend policy theory 2.4 Studies on the relationship of dividend and related financial factors 2.4.1 Dividends and earnings The essential of dividend policy is actually referred to the balances earnings distribution between shareholders and future investment which after paying income tax and keeping back all kinds of reserve funds (Wang et al, 2006USER2010-10-31T21:40:00 Fr RS). As dividends are paid out of the net earnings of a firm, thus, there could be ways to look at this matter. One view is that dividends can be used as a predictor of earnings whereas another view is that earnings can also be used as a predictor of dividends. Therefore, both of these concepts are interrelated as both determine each other (Eriotis et al, 2007USER2010-10-31T21:40:00 act get fr zafar et al but use other reference (a bird eye view)). Zafar et al (2010USER2010-10-31T21:40:00 Earnings Management and Dividend Policy An Empirical comparison between Pakistani Listed Companies and Chinese listed Companies) examined a study of the impact of earnings management on dividend policy for two countries that is Pakistan and China. The study show that both Pakistan and China are neighboring developing economies however growth rate of China economy is far better than Pakistan. These two countries have recently started emphasizing on corporate governance practices, despite of very different business environment of two countries. The result shows that for both countries, earning management has no impact on dividend payout policy. Another view of impact on dividend policy such a permanent increase in profit may lead to an increase in dividend, but not necessarily to an increase in the payout ratio. However, if the aggregate profit increase were a cyclical increase that could be expected to be followed by a decline, then the payout ratio might fall. The reason is due to firms do not generally raise dividends in response to a short-run profit increase. 2.4.2 Dividends and liquidity Funds management is the core of sound firm planning and financial management. Liquidity of a company represents the ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund increases in assets. Firms have liquidity potential in dividend distribution policy when it has the ability to obtain sufficient funds, in a timely manner, at a reasonable cost (MBA resource, 2008aUSER2010-10-31T21:40:00 Change author , fr RS). A dividend represents a cash outflow, therefore, the greater the funds as well as the liquidity of a firm, the better the ability to pay dividend. The dividend distribution policy of a firm is depends very much on the liquidity position. A firm might lose liquidity, it will exercise influence upon dividend policy (Kumar, 2008aUSER2010-10-31T21:40:00 RS). As an example, a firm that experiences sudden unexpected cash outflows by way of large deposit withdrawals, large credit disbursements, unexpected market movements or crystallization of contingent obligations. Besides, it may also caused by some other event causing counterparties to avoid trading with or lending to the firm (Kumar, 2008b). Therefore, a firm dividend policy will be affected when the firms exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. A profitable firm may have adequate earnings but it may not have sufficient cash to pay dividends. Thus, the important for the management to take into account the cash position and the overall liquidity position of the firm before and after payment of dividends while taking the dividend decision. USER2010-10-31T21:40:00 Fr dividend policy theory Company dividend distribution policy is highly dependent upon liquidity position such as particular circumstances of each institution, reflecting differences in capital levels and growth rates as well as regulatory issues. The board members of a firm must weigh the value of retaining capital to grow the firm against returning the capital to shareholders in the form of dividends (Glowasky Giese, 2003). USER2010-10-31T21:40:00 RsIn a dividend policy, stock dividend will be distributed when the cash position is weak. If cash position is good, company may distribute the dividend in form of cash (MBA resource, 2008bUSER2010-10-31T21:40:00 Change author). Mirza and Afza (2010USER2010-10-31T21:40:00 Ownership Structure and Cash Flows As Determinants of Corporate Dividend Policy in Pakistan) described that, cash generated from operations play an important role in deciding the amount of payout. Those companies which have greater cash flow generated from operations are expected to be in a better position to pay cash dividends rather than companies having negative operating cash flow. From the cash flow sensitivity point of view prior studies reported by Khurana et al (2006USER2010-10-31T21:40:00 Find this reference) stated that, financially constrained firms accumulate higher cash holdings and retain greater portion of the cash earned during the period. It means that liquidity is more important when firms cannot raise funds from external market and liquid resources are required for investment in future profitable projects. Thus, the dividend payout policy of a firm may affected or reduced. 2.4.3 Dividends and investment opportunities Investment opportunities of a firm represent the Net Present Value (NPV) investment of a particular firm. The NPV of an investment is the present discounted value of future cash inflows minus the present value of the investment and any associated future cash outflows (Anthes, 2003). It investment opportunities important in determines the dividend policy since it involve the cash flow which is factor influence of dividend policy. The high growth firms which that need great amounts of funds for positive NPV investments, it usually pay relatively low amounts of dividends when compared to firms with few positive NPV investments and vice versa. Braggion and Moore (2008) USER2010-10-31T21:40:00 RSstates that many shareholders would like to constrain the cash available to managers for fear that the companys resources would be used in wasteful activities of the companies with few investment projects. As a result, shareholders associate reductions or omissions of dividend payments with a rise of managers wasteful activities which leads to a negative abnormal return. Therefore, according to the past researches, many companies with the relatively few investment opportunities were more likely to pay a dividend. As point out by Porta et al (1999), a country with good shareholders protection and is compare two companies in that country which one with good investment opportunities and growth prospects, and another with poor opportunities. In this situation, the shareholders would accept low dividend payouts but with high reinvestment rates from a company with good investment opportunities. The reason is due to the shareholders know that when the companys investment pay off, they could extract high dividends. In contrast, a mature company with poor investment opportunities would not be allowed to invest unprofitably. As a consequence, with good shareholder protection, high growth companies should have significantly lower dividend payouts than low growth companies. 2.4.4 Dividends and taxations High taxation will reduce the earnings of companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. The changes in corporate dividend payout would be expected whenever the government changes its income tax policy. Companies are obligated to make payment for corporate tax including other statutory taxes to the government when the profits are made (Nnadi Akpomi, 2008aUSER2010-10-31T21:40:00 RS). This is an essential corporate responsibility particularly profit making companies. The taxes no doubt reduce the profits available at the disposal of the organizations, either to be retained or distributed as a dividend to shareholders of the company (Nnadi Akpomi, 2008b). There are two types of taxation system on the dividend policy which is full imputation system and single tier system. According to the Tax system Malaysia (Khoo Lim, 2008), the taxation of company is based on single tier system which profit earned by companies are only taxes one, that is on the company that gained those profit. When company declares dividends, the profit thus distributed is no longer taxable on the shareholders of the company. In another word is dividend received by shareholders are completely tax free and will not need to be declare as taxable income (Chong, n.d.). The benefit of single tier system is companies with capital gains and non taxable accounting profits are able to declare dividend without any constraint. Thus, it might bring higher dividend yields to shareholder. Chen and Dhiensiri (2009) USER2010-10-31T21:40:00 Determinants of Dividend Policy: The Evidence from New Zealandconducted the study on determinants of the corporate dividend policy of firms listed on New Zealand Stock Exchange (NZSE). In this research has show that, the taxation of dividends in New Zealand was reformed with the introduction of a full imputation system which is similar to the imputation systems of Australia and the UK. Profits were taxed at the corporate level and then again as dividend income at the personnel level before reformation. The benefit behind an imputation system, apart from avoiding double taxation on the same income, is to tax the taxable income of companies at the marginal tax rate of their shareholders. This can be argued that upon the declaration of dividends, the shareholders are taxed on the grossed dividends at their own respective tax rates. A full imputation system will discourage payment of dividend, especially in the case of family controlled companies. The above different taxation system will bring different impact on dividend policy. 2.5 Studies on other dividend policy issues 2.5.1 Signaling effects Signaling theory posits that dividends can convey information about the current or future level of earnings. Gilbert et al (2008USER2010-08-01T21:58:00 Dividend policy in South Africa) states that, firms that announce changes in the dividend policy, they are conveying information to the market. In the concept of signaling theory, firms that with good future prospects should take actions that are not easily duplicated by those firms with poor prospects. One of the way to achieve this is by paying cash dividend, since the firm is making a long-term commitment to future dividend payments. Manager in struggling firms will be reluctant to divest themselves of cash in order to send a false signal of prosperity. As a result, investors are more likely to interpret positively an increase in dividends from management. Most of the favorable behavioral reactions of stockholders to positive signal dividend convey as well as the economic rationale for a reliable dividend policy suggest the underlying value of dividends. The stability in dividend policy is often necessary to eliminate uncertainty and the potential poor market valuation by investors associated with unpredictable dividend payments, as well as a decrease in dividends often results in a negative market response as seen by a reduction in the price of stock.USER2010-08-01T21:59:00 Find author (get fr WHAT FACTORS MOTIVATE THE CORPORATE DIVIDEND DECISION? The information content of dividends signaling predicts that dividends can be used to signal firms future prospects and only good quality firm can use such a device. A potential proxy for the degree of information asymmetry is the trading volume of a firms shares. In general, investors tend to invest in securities that are better known in the market such as with less information asymmetries. Therefore, other things being equal, the higher the information asymmetry of a security, the lower its trading volume.USER2010-08-01T22:00:00 Find author get fr Determinants of Corporate Dividend Policy in Jordan: An Application of the Tobit Model 2.5.2 Clientele effects Clientele effects is the tendency of a firm sets a particular dividend payout policy, which then attracts a clientele consisting of those investors who like this particular dividend policy. For instance, some investors such as university endowment funds and retired individuals more tend to prefer current income to future capital gains, so this group of investors wants the firm to payout a higher percentage of its earnings. Other group of investors has no need for current investment income may simply reinvest any dividend income received after first paying income taxes. Therefore, these investors favor a low payout ratio.USER2010-08-03T12:08:00 Fundamentals of financial management (textbook) Azzopardi (2004) surveyed a studied of dividend irrelevance and the clientele effect. In the studied, investors are attracted to different company dividend policies, and will adjust their stock holding accordingly when the company dividend policy changes. The adjustment of the stock holdings will cause the move of the stock price. Unfortunately, this may mean that the shareholders may incur cost of adjustments. Therefore, an easily identifiable dividend pattern may avoid such costs to the shareholders. 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. Thus, the probably best way for a firm follows a consistent dividend policy that will hopefully attract the suitable clientele and minimize both adjustment costs for the investors and also the discussed consequential costs. USER2010-08-03T12:08:00 Dividend irrelevance and clientele effects This clientele effects study assumes that some group of investors may prefer different levels of dividends due to their different levels of taxation. Many hypothesis states that low-dividend firms attract investors with a high tax rate while that the high-dividend firms attract investors with a low tax rate. A studied result conducted by Lease-Lewellen-Schlarbaum (1976) show that, private investors preferred long-term capital gains, followed by dividend income and then short-term capital gains. USER2010-08-03T12:09:00 Kikki- dividend puzzle a review of dividend theory 2.5.3 Agency theory Jensen and Meckling (1976USER2010-08-03T14:43:00 Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure) examined the separation of ownership and management in a company gives rise to potential agency conflicts between managers and shareholders. This agency conflicts can be mitigated through an increase in ownership and monitoring by large shareholders with a significant equity stake in the company. Dividend may be viewed as one way of imposing discipline on managers, for their payment deprives the firm of some of the cash it would otherwise have available for re-investment. Thus, firms that wishing to grow will have to approach the suppliers of capital to raise the funds for new projects. It will enables those investors to monitors the use to which this capital is being invest in order to ensure that managers are making value adding investment and not just simply growing the firm. Rozeff (1982) study demonstrates that a model in which dividends serve as a mechanism for reducing agency costs, thereby offering a rationale for the distribution of cash resources to shareholders. In Rozeffs model, an optimal dividend policy is the outcome of a trade-off between equity agency cost and transaction cost. Consistent with such trade-off model, Rozeff reported the evidence of a strong relationship between dividend payouts and a set of variables proxy for agency and transactions costs in a large sample composed of one thousand US firm for the period 1974 to 1980 (Farinha, 2002USER2010-08-03T14:44:00 DIVIDEND POLICY, CORPORATE GOVERNANCE AND THE MANAGERIAL ENTRENCHMENT HYPOTHESIS: AN EMPIRICAL ANALYSIS). 2.6 Summary The brief review of literature shows a basic concept and understanding of dividend policy and the factors affecting the corporate dividend policy. To sum up, there are several credible explanation for the existence of dividends policy theories, although none of them is generally accepted or above criticism. In view of these facts, the present study aims to identifying the factors or financial variables affecting corporate dividend policy in food and beverage industry in Malaysia.