The dividend puzzle misspecification : why the role of dividends is not what people think

The dividend payout problem in literature has largely been misspecified. The roles of dividends as signals, agency cost reducers, fixed income providers or even the invariance of dividend payouts are all phenomenon that, based on market conditions, follow from the role of dividends as equalizers of firm value, discounted from a given point in time, across firm’s life. In this study, I discuss few problems with prevalent approaches towards solving dividend puzzle in academia, provide justification for the aforementioned hypothesis based on few assumptions, derive a model applicable under ideal conditions and then measure the deviations from the ideal model in two market indices-Nifty 500 (India) and S&P 500 (USA). The results obtained are then compared with the studies already done on these market and the reasons for deviation are discussed. Once the dividend model is derived, all roles of dividend flow automatically from the primary role of dividends and the extent of efficacy of each of the secondary role is based on numerous factors which vary, giving different results across different studies. The empirical investigation gives a view of these different factors at work in the markets.