Dividend Controversy: A Theoretical Approach

One of the major financial decisions for a public company is the dividend policy - the proportion in which the company decides to distribute profits to shareholders. The difficulty of the decision comes from the implications on firm value. There are conflicting points of view on dividend policy. Even if under ideal conditions (perfect markets) dividend policy is irrelevant (the theory of Modigliani and Miller), still the way in which companies behave shows that the dividend policy is relevant in practice. Market imperfections (taxes, information asymmetry, transaction costs) influence dividend policy. The aim of this paper is to present the major theories and findings related to dividend policy that can help managers to make their decision of profit distribution with a positive impact on the stock price.