This theory indicates that due to changes in dividend policy, investors always make decisions based on the dividend policy chosen by the company which can encourage investors to continue investing in the company or switch to another company.
- Signaling Theory
Karasek & Bryant (2012) state that Signaling theory is a practice carried out by company management to provide information to investors regarding how management monitors the company's prospects. This theory suggests that managers use dividend payments as a means of sending messages to outside investors and shareholders regarding their profit forecasts and operational success, reflecting the performance of company management.
- Agency Theory
According to this theory, investors desire to increase their cash flow by receiving a larger dividend distribution from earnings, while management tends to choose to increase the share of undistributed earnings to ensure sufficient funds for investment or expansion, which may trigger a conflict of interest between the two parties.
- Pecking order Theory
This theory states that companies tend to prefer to fund their activities using internal resources, such as cash flow, retained earnings, and depreciation, rather than relying on external resources. This theory also states that companies with high levels of profitability tend to have low levels of debt, as they have better access to internal resources.
Dividend Forms
- Stable Dividend Policy
This mechanism involves the regular distribution of profits at a fixed rate, thereby meeting shareholder expectations and overcoming the challenges of fluctuating profits with minimum dividend payments made annually.
- Progressive Dividend Policy
This is the process by which dividends are distributed in line with the achievement of profits and the increase in earnings per share.
- Regular Dividend Policy
According to this policy, regular profits will be given to all shareholders every year. If the profit is unreasonably large, it will be kept as retained earnings and the excess profit will not be distributed to shareholders.
- Irregular Dividend Policy
This mechanism involves an irregular profit sharing policy. Companies apply this mechanism when there is no fixed level of profit or stability, or when there is no consistency in achieving profits, or when the company does not have sufficient liquidity.
- Scrip Dividends
These dividends are often referred to as stock dividends and are distributed to shareholders in the form of stock certificates rather than cash. They give shareholders the option of receiving future profits or getting additional shares. Companies issue such dividends when they do not have enough cash to pay dividends in cash.
- Non-Cash Dividends
Under this policy, companies tend to choose to issue new shares to shareholders as an alternative to paying dividends in cash. This approach requires that the company has a significant amount of reserves and retained earnings, and also demonstrates a willingness to set aside earnings and reserves for the future based on attractive investment opportunities.
- Shares Split
