Behavioral finance FAQ / Glossary (Dividend)

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This is a separate page of the D section of the Glossary


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Dividend puzzle


Why do they share the spoils with you, Mr. Stockholder?

Or don't share them?

Double definition:
      Personal income source and corporate policy tool

Shareholders invest to earn money, don't they?

And their income is supposed to come from cash dividends,
isn't it?

You mean, investors can pay themselves by ...making the
stock price rise ?

Whatever reason, the dividend policy differs radically from
one firm to the other.

So much that, even if their earnings and liquidity situation allows to pay
dividends easily, some firms do not pay out any, or only small ones.

The puzzle

Imagine your financial advantage if you can pay,
not with hard cash, but with a signal that makes
the stock price rise!

The puzzle is that, at least in buoyant times (*), many firms
that do not
pay dividends are still well-priced by stock
markets, in spite of that lack of direct income for stockholders.

The main causes seems to be, not a veneration for avarice,

The stockholders' belief that a lack of dividend while the
    company could give a comfortable one might be a

  "signal"  that the firm can make a more fruitful
in its own 
than the use stockholders
could do by themselves
by reinvesting somewhere else if it
the cash.

Trust me, whispers the CEO in your ear, I'm better than
you at creating value!

Also tax systems, which are usually not too favorable to
and much more in favor of plowing in profits in the

company in the hope of capital gains.
hope of capital gains.

That is why another version of the dividend puzzle is
"why do
companies with good investment
opportunities in their own operations, give dividends?"

(*) In harder times people like to see real money in their pockets.

Is this shareholder attitude rational?

Appreciating the disdain?

The rationality of a belief that the money is better and more wisely used in
the company's pockets than in the shareholders' ones
can obviously be

For example it could be argued conversely that paying dividends signals that
the firm makes real profits, not fake or fragile ones.

Even fast developing companies who need to do important capital investment
for their future development are rather disdainful towards their shareholders if
they never give them some meat.

At the other extreme, it would be irrational to venerate a company that would
pay more dividends
that it could afford for its financial safety and economic
sustainability, although it sometimes happens.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at BF polls


This page last update: 05/09/15  

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