Does dividend policy affect shareholder value?

Dividends are sums of money paid to shareholders out of profits. In the UK dividends are usually paid out twice a year, there is an interim dividend half way through the year and a final dividend after the AGM. Dividends are only paid out of accumulated distributable profits and not out of capital, mainly to protect creditors.


There are many academics that argue that shareholder value is based around the market value of the shares. With the assumed business purpose of shareholder wealth maximisation. Arguably, the best way of maximising shareholder wealth is through capital gains by increasing the share price. Considering this, does dividend policy affect share price?


The answer to that question is yes, although some may argue that share price is not affected by dividends, if you consider the signalling effect, I believe it is clear that actually dividends can affect share price. The signalling effect is a result of information that is released which sends a signal as to the performance and position of the company. If we consider for example, if a company has continually paid dividends to it's shareholders, but suddenly announces that no dividends will be paid in the financial year, the signal that shareholders will receive is that the company is not performing well. Following this information, the share price will drop and vice versa.


However, there are arguments that state that dividend policy has no effect on shareholder value. This is because when a firm decides to distribute the remaining profits to shareholders through dividends, the stock price will be automatically reduced by the amount of a dividend per share on the ex-dividend date. So in a perfect market, dividend policy does not affect shareholder wealth.


There are many arguments surrounding dividend policy and shareholder value but I believe that dividend policy does affect shareholder value.