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How should investment opportunities influence dividend policy?© BrainMass Inc. brainmass.com March 4, 2021, 6:13 pm ad1c9bdddf
THE EFFECT OF INVESTMENT OPPORTUNITIES ON DIVIDEND POLICIES
While comparing regulated and unregulated firms, we find some interesting results. On average, a regulated firm is less risky; has a lower growth rate; has much fewer insiders holding its common stock; and has fewer investment opportunities, but pays a higher percentage in dividends. Possible explanations for this include the following: while the issue of dividend policy is far more pervasive, we can understand the determinants of dividend payout for firms. Specifically, those concerned with addressing what factors determine the dividend payout rate. Hence, for the purpose our understanding, a firm's dividend policy is proxied by its dividend payout rate, which is defined as the ratio of dividends per share and earnings per share.
Some other issues also affect the dividend payout rate:
Past growth should be an important determinant of the dividend payout rate. In general, a firm would look at its (recent) past growth rate when deciding how much of its earnings it needs to retain (for growth), and how much to give away as dividends.
The decision to pay dividend and the investment opportunities:
Why do firms pay dividends? If they didn't ...