Financial Management Essay Example | Topics and Well Written Essays - 2000 words - 1

Financial Management - Essay ExampleDividend relevance The relevance of dividends in the wrong impulsion of the sh ares will be very senior high school in case there is a shift in the fundamental factors governing dividend policy. Agency theory posits that dividend mechanism provides an incentive for managers to reduce the cost associated with the principal/ broker relationship. Distributing resources in the form of cash dividends forces managers to seek outside capital, thus causing them to reduce agency costs as they subject themselves to the scrutiny of the capital marketplace (Mohd et al., 2005, p.367) The fundamental factors in this regard are profitability of the companies, the investiture opportunities available to the companies for plough back of profits for the appendage and management policy. Therefore, any dislodge in the continued practice or policy is reviewed critically by the investors. In could affect the entertain of the shares in the following ways. 1. The exi sting investors sell the investment firms if the change in policy impacts future dividends and is inconsistent with their investment objectives. 2. The change in policy could attract new investors if it is consistent with their investment objectives. 3. The demand and supply of stocks out-of-pocket to change in dividend policy will influence the market outlays. ... The process of price discovery in the market is greatly vitiated in general by the interplay of these factors. Though these factors do cause price movements, the impact is very unpredictable. This leads to speculation with regard to the motives of the management of a company relating to dividend decisions. The investor community would generally be affected by these dividend decisions due to lack of access to market information or inability to encounter the information and its impact on the stock prices. There would be violent fluctuations of the stock prices in the neat run which are caused not due to information con tent in respect of dividends, but opposite considerations or perceptions. The fundamental factors influencing dividend policy Profitability of company, its growth over years, the opportunities available to company for investment inside company and management policy are the important factors governing dividend policies of the companies. Earnings growth The consistency and growth in payment of dividends by a company over years are discounted in the stock prices under efficient market conditions. The companies with good track record in this respect command high price/earnings multiple in valuation of their companies stocks. Dividend policy is, therefore, relevant to the premium in price/earnings multiple attached to the stocks. But, the recurring dividend announcements in line with the expectation of the market are not the determinants of the value of the stocks. However, when the earnings beat the expectation of the market and company increases dividends substantially or the payout r atio is change magnitude significantly, the investors expect that the increase in dividends will be maintained in the