Dividends as Reference Points
Dividends as Reference Points: A Behavioral Signaling Approach
The article “Dividends as reference points: A behavioral signaling approach” discusses the standard dividend signaling theory and its impact on the financial and operational performance of commercial companies and firms. According to this theory, dividends serve as tools for business executives to change or deteriorate firm value that is viewed as signals of the remaining operations (Baker, Mendel, & Wurgler, 2015). The process of spending money usually occurs in the context of foregone profitable investment, inefficient tax distribution, and costly external financial operations (Baker et al., 2015). Though many executives reject this idea, dividends serve as signals for shareholders, emphasizing that a reduction in finances will have negative consequences on the financial performance of the company (Baker et al., 2015). Therefore, this article discusses the context of this theory and suggests optimal solutions for more appropriate usage and distribution of dividends.
Baker et al. (2015) developed a new realistic signaling theory that suggests using past dividends as a point for predicting and analyzing the future ones. This approach finds great support in numerous empirical and experimental studies and proves to be an efficient method of identifying and utilizing a company’s dividends. According to this theory, the analysis of dividends requires consideration of market reactions, survey evidence, dividend smoothing, and prevalence of regular dividends over regular repurchases (Baker et al., 2015). Moreover, this theory states that dividends can be regarded as significant reference points and signals in case they are paid memorably and regularly (Baker et al., 2015). Correspondingly, it is possible to assume that appropriate usage of dividends can benefit the financial capacities of companies and ameliorate their market performance.
Overall, this article provides information in a comprehensive, logical, and structured way. It contains several sections marked with corresponding headings which reveal different aspects of the dividend signaling theory (Baker et al., 2015). The article also contains graphical formulas and equations that provide statistical and mathematical proofs of the theory and demonstrate its reliability (Baker et al., 2015). The authors provide a critical analysis of the literature and base their experiment on the existing studies and research, which adds credibility to their findings.
Apart from that, this article bears a practical meaning and implementation as it provides recommendations for business executives about the usage of dividends. It describes the adverse effects of dividend cutting and its impact on the shareholders and financial operations of a company (Baker et al., 2015). Therefore, this article provides valuable insight into the signaling dividend theory and reveals unique experimental findings on the effects of dividend cutting on the company’s performance.
Another theory is presented in the article “Juicing the dividend yield: Mutual funds and the demand for dividend” written by Harris, Hartzmark, and Solomon (2015). This article investigates the process of dividend juicing and its benefits for companies. Dividend juicing is a term that denotes a situation when mutual funds buy stocks before paying dividends to increase artificially their value and significance (Harris et al., 2015). This process helps funds to gain a larger inflow, especially in cases when funds lack unsophisticated investors (Harris et al., 2015). As a result, this strategy can be beneficial for funds since it helps to gain extra income and decrease taxes. However, this strategy might appear costly for investors as it presupposes higher turnover rates and increased taxes per year (Harris et al., 2015). In this article, the authors investigate the issue of dividend juicing and describe the advantages and disadvantages of this process from different perspectives.
On the one hand, dividend juicing is a controversial activity as funds can apply to capital return instead of cash distribution among investors, which is a costly, continuous, and problematic activity (Harris et al., 2015). This is particularly important for those funds whose investors are interested in capital return, which is not taxable in contrast to dividends. However, in some cases dividend juicing might be justified and rational (Harris et al., 2015). One of such motivations is the difficulties of ascertaining the costs and source of dividend juicing, which means that investors rarely check costs connected with this process (Harris et al., 2015). Therefore, unless juicing is punished (which is often the case), investors continue collaborating with funds despite the nature of dividend yields and costs.
Moreover, this strategy helps funds to create visibility that their finances are in a good condition, while the direct capital return reports the lack of investment ideas (Harris et al., 2015). Apart from that, the reasons for dividend juicing might be merely ethical or philosophical as many investors prefer to gain income from dividends rather than capital returns (Harris et al., 2015).
Overall, this article provides a detailed overview of different aspects of dividend juicing regarding various contexts and funds. The authors have developed this concept and demonstrated its implementation through different examples and case studies. The article contains graphical and mathematic appendixes and formulae, which help to understand the issue and check its practical implementation. Moreover, the text comprises numerous citations and references, which add reliability to the findings. In general, this article is a valuable contribution to the understanding of dividends and their functioning.
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Moreover, an interesting viewpoint is expressed in the article “Short-selling constraints: the asymmetric role of institutional ownership, relative short interest, options and dividends,” which treats dividends as one of the short-selling constraints in marketing (Gutierrez, Johnson, & Stretcher, 2014). The authors of this article have attempted to evaluate four main short-selling constraints regarding both generally falling and generally rising markets. The results were rather controversial when investigating the impact of the same constraints in different contexts. For instance, dividends appeared to increase the returns of companies in the generally falling markets (Gutierrez et al., 2014). However, the same constraint did not produce any significant effect on the returns of firms in the generally rising market environment (Gutierrez et al., 2014). Thus, there is a need for further research on the influences of dividends in various marketing settings.
The authors conclude on the asymmetric nature of the four constraints and their impact on the generally rising and falling markets. The asymmetric results could be observed everywhere throughout the experimental research of the proposed model (Gutierrez et al., 2014). The authors conclude that the nature of the effects of dividends as one of the four short-selling constraints depends exclusively on the individual case of the firm and the environment of its functioning (Gutierrez et al., 2014). For example, the dividend-paying firm may be more short-term constrained in comparison with a non-dividend-paying one depending on the context and the nature of its financial and operational activities (Gutierrez et al., 2014). Moreover, a combination of several short-selling constraints leads to totally different results, meaning that several combinations should be considered regarding generally falling and rising markets (Gutierrez et al., 2014). Respectively, there is no universal advice regarding the use of dividends in short-selling operations.
The article contains a wealth of information and analyzes various constraints. Thus, apart from dividends, the asymmetric role of institutional ownership, relative short interest, and options are also discussed as short-term constraints (Gutierrez et al., 2014). As a result, it might be difficult to find the needed information in the article due to the abundance of text and multiple reflections. The article lacks interpretation of definitions, focusing on a specific target audience who is familiar with the issues of short-selling constraints and generally falling and rising markets (Gutierrez et al., 2014). Nevertheless, the article is well-organized, comprehensive, and classified into individual sections, which assists in the search for the required information.
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Finally, the article “Dividends: Relevance, rigidity, and signaling” by Sigitas Karpavi%u010Dius (2014) discusses different theories of dividends and provides examples of their practical implementation and utilization. The article focuses on the explanation of the equilibrium model and dividend smoothing (Karpavi%u010Dius, 2014). Dividend smoothing is a term that denotes the relative equation of dividends and earnings per share (Karpavi%u010Dius, 2014). It applies Lintner’s Model, which considers two main aspects such as the target payout ratio and the speed of adjustment of dividends to the existing indicators of the target (Karpavi%u010Dius, 2014). In this article, the author proves that the firm value highly depends on the payout policies of a company. For this purpose, the article discusses several relevant models and theories of dividends and compares them to draw objective conclusions.
According to this article, firms with stable dividends have higher rates of payout policies (Karpavi%u010Dius, 2014). This issue explains the rigidity of dividends, which appears with time. To prevent dividend cuts and to protect themselves from losses, the firms can combine different types of dividends (Karpavi%u010Dius, 2014). For example, in addition to cash dividends, firms may apply special dividends and share repurchases, which serve as good methods of preventing dividend cuts in case of deterioration of their payout policies or any other financial capacities (Karpavi%u010Dius, 2014). Nevertheless, the author states that there is no universal solution or theory about dividends being equally useful in all situations. Particularly, the signaling theory of dividends appears to work in the case of falling markets and relatively stable dividend shares (Karpavi%u010Dius, 2014). However, in other cases, the Modigliani-Miller theory may also be helpful for firms (Karpavi%u010Dius, 2014). This theory states that the value of firms can be estimated through their earning power and other assets, while the distribution of dividends and investments does not play a major role in this process (Karpavi%u010Dius, 2014). This conclusion shows how relative the issue of dividends is and to what extent it depends on the individual case of companies and funds.
This article represents a valuable systematic review and experimental research, which discusses the meaning of dividends through the paradigms of different approaches and theories. It provides a clear and structured analysis of various theories related to the interpretation of the role of dividends in the firms’ value. The article brings valuable insight into the relative nature of dividends and their meaning in various contexts. Apart from that, this article is supported by relevant literature sources and citations from previous experimental and empirical research, which helps to consider it truthful and significant. Overall, this article reveals important aspects of dividends from various viewpoints.
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