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This paper aims to briefly review principal theories of dividend policy and to summarize empirical evidences on these theories.

Major theoretical and empirical papers on dividend policy are identified and reviewed.

It is found that the famous dividend puzzle is still unsolved. Empirical evidence is equivocal and the search for new explanation for dividends continues. Also a number of stylized empirical facts about dividends discovered by researchers are noted.

As with any review paper, the major limitation is that necessarily some papers will be left out. Also as newer research is published the review paper will become more dated.

This paper will give the reader a comprehensive understanding of the dividend puzzle and the major paradigms of dividend policy. The paper will also give the reader the major stylized facts about dividend policy.

We test for the validity of the smoothing and signalling hypotheses of dividend determination.

Using a VAR framework we examine the dynamic behaviour of share prices, dividends and earnings for 137 UK manufacturing and service companies, observed over the period 1970‐2003.

There is strong evidence of a contemporaneous relationship between prices, dividends and earnings, and little evidence of independence between these variables. Some evidence in favour of both the smoothing and the signalling hypothesis is obtained from causality tests, with perhaps more support for the latter hypothesis. However, there is considerable diversity in the causal relationships between prices, dividends and earnings.

No single hypothesis regarding the determination of dividends, and the predictive power of dividends for earnings and prices appears to dominate.

The results presented here are of interest to markets agents in that while they suggest there is no single transition mechanism linking prices, dividends and earnings, nevertheless these three variables are strongly correlated and exhibit varying degrees of causality.

“The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials who must set the policy, but to investors planning portfolios and to economists seeking to understand and appraise the functioning of capital markets. Do companies with generous distribution policies consistently sell at a premium over those with small payments ? Is the reverse ever true ? If so, under what conditions? Is there an optimum payment ratio or range of ratios that maximises the current worth of the shares?”.Although these questions of fact have been the subject of many empirical studies in recent years, no concensus has yet been achieved. Not only does the empirical evidence seem to conflict, but the underlying theory of share price determination cannot be agreed upon. This chapter surveys current theories concerning dividend policy, and seeks to reconcile them under a common set of assumptions. Then the relevant empirical evidence is presented and criticised, and finally a piece of research carried out by the author is discussed.

This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia.

The sample of this research comprises 248 firms from Indonesian Stock Exchange during 2004-2006. This research using Transparency and Disclosure Index (TDI) to measure corporate governance in Indonesia

We find that TDI are low among Indonesian firms, with a score of 32 per cent out of the maximum point. This score indicates that Indonesian corporate governance is still low. The results show that there is a negative relation between corporate governance and dividend policy in Indonesia. Thus, the Indonesian companies pay more dividends when corporate governance practice is low. This result confirms applicable of substitution theory in Indonesia.

This research focuses on manufacturing industry in Indonesia. Therefore, the conclusions of this research apply on the manufacturing companies in Indonesia

This research shows that companies with poor corporate governance pay dividend higher than companies with better corporate governance. Thus, investor can use this information to make investment decision.

This research provides evidence on the negative effect of corporate governance on dividend policy in Indonesia (substitution theory).

This study seeks to examine the determinants of dividend payout ratios of listed companies in Ghana.

The analyses are performed using data derived from the financial statements of firms listed on the Ghana Stock Exchange during a six‐year period. Ordinary Least Squares model is used to estimate the regression equation. Institutional holding is used as a proxy for agency cost. Growth in sales and market‐to‐book value are also used as proxies for investment opportunities.

The results show positive relationships between dividend payout ratios and profitability, cash flow, and tax. The results also show negative associations between dividend payout and risk, institutional holding, growth and market‐to‐book value. However, the significant variables in the results are profitability, cash flow, sale growth and market‐to‐book value.

The main value of this study is the identification of the factors that influence the dividend payout policy decisions of listed firms in Ghana.

The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more flexible than dividends and managers have a strong desire to maintain dividend levels and dividend payout ratio of the firms.

The authors first run a Tobit regression to examine whether firms meeting or just beating the quarterly dividend per share threshold exhibit unusually high repurchases, controlling for the factors shown to affect repurchases. The authors then calculate abnormal repurchases and compare firms that would otherwise miss the benchmark with other firms.

The authors find that firms meeting or just beating the quarterly dividend per share threshold repurchase more shares than other firms, after controlling for the substitution effect, investment opportunities and financial performance. In addition, firms otherwise missing the quarterly dividend per share threshold repurchase abnormally more shares to meet the threshold.

The study contributes to the payout policy literature in the following ways. First, it extends the understanding of the association between dividend payout and repurchase. Second, it contributes to the threshold literature by showing that firms manipulate repurchases in addition to earnings to meet their quarterly dividend per share threshold. Third, it provides support to the survey evidence that firms have a strong desire to maintain their dividend policies.

“The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials who must set the policy, but to investors planning portfolios and to economists seeking to understand and appraise the functioning of capital markets. Do companies with generous distribution policies consistently sell at a premium over those with small payments ? Is the reverse ever true ? If so, under what conditions ? Is there an optimum payment ratio or range of ratios that maximises the current worth of the shares ?”. Although these questions of fact have been the subject of many empirical studies in recent years, no concensus has yet been achieved. Not only does the empirical evidence seem to conflict, but the underlying theory of share price determination cannot be agreed upon. This chapter surveys current theories concerning dividend policy, and seeks to reconcile them under a common set of assumptions. Then the relevant empirical evidence is presented and criticised, and finally a piece of research carried out by the author is discussed.

The objective of the firm is to maximise the wealth of its owners. If corporate managers can maximise the market value of the firm by manipulating dividend payments, then they should do so. The optimal dividend policy, if there is one, is the policy which maximises shareholder wealth. As the value of the firm depends upon anticipated operational cash flows, new investment, and risk, then it seems improbable that managers can create wealth by distributing cash flows generated by successful trading between dividend payments and retentions within the company.

The purpose of this paper is to examine whether the catering incentives of dividends can influence firms' dividend payment decisions in Thailand.

The sample includes all listed stocks in the Stock Exchange of Thailand during the years 1992‐2009, excluding the firms from financial industries and firms with incomplete information. The catering incentives are measured by dividend premium. The firms' dividend payment decisions are measured by propensity to pay dividends and decision to change dividends.

The findings yield qualitatively consistent with the previous research. After controlling for the effect of the Asian Crisis during 1997‐1999, the result shows that the firm's decision to pay dividend could be affected by the catering incentives. Furthermore, dividend premium will reduce the probability that firms will decide to cut dividend payment from previous years.

The result is limited to the availability of historical data. The Stock Exchange in Thailand has been established for only 35 years. With the lack of availability and completeness of data, the historical data could be gathered for only 18 years.

Investors in Thailand show their preference for dividend incomes. This could be the catering incentive of the firm to decide to pay dividends.

This paper offers the evidence of catering incentives of dividend proposed by Baker and Wurgler in the emerging market. Even though the result is not strong, it can be the evidence supporting the catering theory of dividend, not only in well‐developed markets, but also in emerging markets such as Thailand.

This paper aims to explore the potential use of a dividend capture strategy by individual investors. This strategy arises from the 2003 tax law changes which lowered tax rates on dividends received, while leaving the short‐term tax rates on capital losses unchanged. In addition, leverage can be used in combination with an aggressive call‐writing strategy to receive a multiple of the tax‐advantaged dividend yield without a corresponding increase in risk.

In addition to illustrating how the dividend capture strategy works, a new method of comparing returns between strategies is developed. This method does not rely on a particular risk‐return model, such as is used by the Sharpe ratio or Jensen's alpha methodologies. Finally, a formula is derived which computes the borrowing (margin loan) rate that makes the aggressive call‐writing strategy profitable.

The 2003 changes in US tax laws provide individuals with an opportunity to apply dividend capture techniques similar to those which have been available to corporations for many years. However, corporations use dividend capture techniques to lower risk, while individuals require risk exposure to keep the possibility for capital gains. Thus, a method is developed for capturing an enhanced tax refund on the drop in stock price caused by the stock going ex‐dividend without giving up the potential for capital gain. A byproduct of this method is a straightforward means to measure risk‐adjusted returns for the covered call strategy. The aggressive call‐writing strategy described in this paper is found to offer enhanced returns without an increase in risk for those in the top individual tax brackets.

The specific level of additional risk‐adjusted returns available depends on the tax rates and interest (margin loan) rates facing the investor.

Following the 2003 tax law changes, individuals can receive returns on stocks higher than implied by the statutory tax rate on dividends by employing a dividend capture strategy which involves writing call options on dividend‐paying stocks. This paper also demonstrates that the risk exposure necessary to obtain full capital gains potential can be maintained with an aggressive strategy. This strategy inherently provides a method to judge the extent of improvement without having to rely on questionable assumptions of any specific asset‐pricing model.

The paper provides an alternative to conventional covered call‐writing strategies which reduce exposure to capital gains. Individual investors and their advisors will find a method to maintain exposure to market risk and therefore the full potential for capital gains, while receiving preferential tax treatment on dividends received. Researchers will find a method to directly compute risk‐adjusted return for covered call‐writing strategies without having to rely on assumptions made in the asset‐pricing models underlying the Sharpe ratio and Jensen's alpha.