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  3. The University Of Kent (UKC)
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  5. Corporate Finance

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Bullet Points on factors that determine dividend payout policy

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Comprehensive Notes taken on the factors that determine dividend payout policy written concisely and clearly in response to a past paper exam question.

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  • May 29, 2024
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  • 2023/2024
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Should a company adopt a high dividend payout, low dividend
payout, or even not pay dividends at all? There are various
factors a company must consider when deciding on its
dividend policy. Identify and discuss those factors.
(try to link these factors together to write about)
Seminar Discussion:
 Investors have a lack of information, then they will more
tend to demand a higher dividend (relates to corporate
governance); companies must follow dividend disclosure
requirements (if there is less legislation = investors are not
protected, if this does not exist = investors can’t)
 Level of Competition between firms: If firms in a specific
industry are paying shareholders large dividends, then other
companies may wish to do so, to appear that they are
performing well, even if they are not
 Level of Competition: Two types: industry peers: Peers
follow large dividends: signals good performance and good
management (translates to smaller peers): Herding Behaviour
 Competition in firms across different industries: have
different asset structures, fixed asset companies do not have
liquid assets, large firms pay attention to liquidity compared to
non-fixed assets to firms: so, dividend payouts cannot be
compared
 Size of Firms: Smaller Firms wish to retain cash for
reinvestment: Issue of Access to Cash (Large Public Firms have
access to capital markets/FI’s like banks), SME’s do not have
access (growing stage = lack of finance access/wish to retain
cash for positive NPV investments)
 Life Cycle of the Firm must be combined with size of
the firm; Companies in growing life cycle stage, wish to
reinvest into opportunities, in long-term shareholders receive
a higher dividend payout.
 Dividend Payout vs Company Stability of Operations:
Dividends come from earnings (so this depends on liquidity of
company); firms go bankrupt due to lack of cash to cover
operations/obligations
 Economic Growth of the company; if the growth rate
increases, then dividend payout is likely to be higher, but if
the company is still establishing itself and using excess cash
for reinvestment, then less payout to shareholders/ For

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