Dividend Stability Theory
The main content of this policy is that the company determines a certain level of dividend, maintains a constant dividend payment every year, and only increases dividends when the company can achieve a profitable increase in a reasonable way. firmly afforded a dividend increase. If earnings decline, the dividend level will remain in place until the company determines that a prolonged decline in earnings cannot be prevented in the future.
When a company pursues a stable policy, dividends are likely to increase the price of the company's stock in the market, because dividend policy provides information or signals to investors about the future. good business performance of the company. On the other hand, companies that implement a stable dividend policy are considered by many investors to reduce risks to shareholders more than those that pay erratic dividends. Moreover, companies that implement a stable dividend policy often attract more attention from investors, because most shareholders of many joint stock companies consider dividends as one of their sources of income. to cover regular expenses. These shareholders prefer stable dividend policy.
The theory of dividend surplus
The main content of this policy is that the company pays dividends from the remaining after-tax profit after prioritizing the use of after-tax profits to finance investment in a relationship that ensures capital mobilization according to optimal capital structure of the company. Residual dividend policy is based on the fact that investors prefer the company to retain profits for reinvestment rather than pay dividends, if the rate of return that the company can obtain from reinvestment Return on investment is higher than the average rate of return that investors can achieve by self-investing in other opportunities with a comparable level of risk.
The implementation of the dividend surplus policy helps the company to actively use profits to meet capital needs for the realization of growth investment opportunities, thereby, providing competitive advantages and potential bring good business prospects for the company in the future.
The disadvantage of this theory is that it can lead to high volatility in the dividend payout ratio, when the company has many investment opportunities, the company will pay a low dividend, or even not pay it at all. . Cutting or not paying dividends is often seen as a sign of a company's financial difficulties. But if in the next time, the company does not have the opportunity to invest profitably, the dividend payout ratio is at a very high level. This will affect investor sentiment, investors undervalue and pay a low price for the company's shares.
The effect of dividend policy on stock price
Miller and Modiglani (1961) argue that stable dividend policy or residual dividend policy have no effect on the firm and have no effect on the stock price if placed in the context of perfect capital markets and with An optimal investment and financing policy has been determined.
However, when placed in an imperfect market, a change in dividend policy affects stock prices. An increase in dividends conveys some kind of information to investors such as higher expected earnings of the company. Similarly, a dividend cut is seen as conveying unfavorable information about the company's earnings prospects. The change in dividend policy is a signal to investors about the future profitability and cash flow of the company. Therefore, changes in dividend payments will affect investors' evaluation of the company, which in turn affects the company's share price.
REFERENCES
Nguyen Minh Kieu, Nguyen Van Diep (2013), Relationship between macroeconomic factors and stock market volatility: research evidence from the Vietnamese market, Journal of Science and Technology Development, volume 6, no. 3 , pages 86-100.
Plamini et al. (2009), The Determinants of Commercial Bank Profitability in Sub-Saharan Africa, IMF Working Paper.
Rose and Hudgins (2008), Commercial Bank Management, McGraw-Hill
Tsoukalas (2003), Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market, Managerial Finance 29, no. 4, 87–92.
Truong Dong Loc (2014), Factors affecting stock price change: Evidence from Ho Chi Minh City Stock Exchange. Ho Chi Minh, Science Journal of Can Tho University, (33), pp. 72-78.
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