International finance strategy Essay Example | Topics and Well Written Essays - 2250 words

International finance strategy - Essay Example Dividend policy pertains to the practice of company’s management in providing dividend payments or taking decisions related to the pattern and size of dividend cash distributions, which are to be made by the company to its shareholders (Nissam and Ziv, 2001). This decision to distribute company profits is critical for the company as it influences the capital structure as well as the stock prices. There are three basic contradictory theories in relation to dividend policies of firms. The first view in this regard claims that increase in dividend payments help to improve firm value. This is the bird in hand argument. The second view postulates that high payouts in the form of dividends have a conflicting effect on value of firm and is known as the tax preference argument. The third view is the dividend irrelevance hypothesis, which asserts that dividend decisions are irrelevant and dividend policy decision has no significant effect on the firm. Corporate managers have been able to realize that dividend payments are necessary to satisfy expectations of the company shareholders. They have tried to smooth out dividends over a long period of time because it is believed that reducing dividends might uphold an unfavourable image of the company to its shareholders. Hence, dividends are also used to give signals to the market about company performance and stability. Dividend policies have a huge impact on a company’s stock prices. There has been an ongoing debate regarding the impact of a firm’s dividend policy over its value and capital structure decisions since 1950s. The following sections shall discuss the issue in detail. In financial terms, the capital structure is a framework based on which a company finances the assets in combination of equity, debt and hybrid form of securities. The capital structure of a company is simply the formation of a company’s liabilities. According to