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Dividend Policy

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My boss studied a sample of firms that either paid their first ever cash dividend or initiated a dividend after a 10 year period of no dividends. An associate found stock prices to fall when dividends are. How would these positive and negative stock price results fit with the dividend irrelevance argument of MM and the opposing effects of taxes and current income needs on stock prices, if future earnings are held constant.

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This solution discusses the relevance of payments of dividends.

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The crux of the argument supporting the irrelevance of dividends to valuation is that dividend policy of a firm is a part of its financing decision. As a part of the financing decision the dividend policy of the firm is a residual decision and the dividends are a passive residual. It is based on the assumption that ...

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