How Accurate is the Statement that 'The Dividend Policy of a Firm is Irrelevant'

Various studies suggest that the question of whether dividend policy affects the value of the firm has puzzled researchers and corporate managers for many years. It is evidence that dividend policy is one of the most widely researched topics in finance. Yet, researchers have different views about whether the percentage of earnings that a firm pays out in dividends materially affects its long-term share price, Dempsey et al, (1993).This essay tried to identify the various studies on the dividend puzzle. It is outlined in this essay that dividend payment by corporate organisations is influenced by various factors. Some of the factors discussed here include legal restrains, shareholders' expectations, taxation and the cash-flow uncertainty effect. This essay established the fact that these factors play a very vital role in corporate managers' decision to pay dividend.On the relevance of the dividend policy, the discussion focused on the Miller and Modigliani's hypothesis of 1961, which was supported by several other researchers like Miller and Scholes (1978), Jose and Stevens (1989). There were, however some criticisms to Miller and Modigliani's hypothesis from other researchers like Sterk and Vandenberg (1990), Farrelly, Baker, and Edelman (1986), who believed that there exist some correlation between firm's dividend policy and its share value.Finally, the essay discussed the relevance of the clientele effect on dividend policy. The study by Elton and Gruber (1970) was discussed and various criticisms on their findings was also discussed. The essay identified the work of other researchers such as Kalay (1982) and Barclay (1987), who criticised Elton and Gruber (1970). It was however agreed by the researchers that the clientele effect has a relevant correlation on corporate dividend policy