Dividend Policy in Perspective: Can Theory Explain Behavior?

The contribution of recent research to the explanation of a variety of behavioral findings is examined, with particular attention to tax clientele effects, cross-section studies dependent on capital asset pricing model assumptions, and dividend signaling models. Further relaxation of standard capital market assumptions appears necessary to reconcile behavior with investor and firm rationality: for example, investors in capital-constrained firms may regard capital gains resulting from earnings retention as more risky than current dividends or stockholders may see dividend payment as imposing constraints on management that reduce agency costs. Copyright 1988 by MIT Press.