Transaction Costs

Transaction Costs

If a shareholder is not paid dividends and is in need for money. he can sell the shares to meet his financial requirement. While selling the shares. It involves transaction cost and if in future he wants to buy the same again he has to pay to pay the transaction cost.

Transaction costs in the form of brokerage is more for small lot and odd lot. Some time the investor faces problem in selling the shares then he prefer current dividends to capital gain.

All the above factors reveal that share holders are not indifferent in current dividends capital gains. The tax differential and floatation costs favours capital gains resulting firm retained earnings: while the transaction costs, preference of current income, information contents. etc. favours current dividends, Hence, dividend policy is relevant.

To conclude, we can say that though empirical evidence on the relevance of dividends has been little more than suggestive. Many companies behave as if dividends do matter and can affect shareholders wealth. As Lindsay and Samety put HenHenHHit. “the only generalization about payout policy that seems quite safe to made is that a cut in absolute dividends is likely to depress the price of the stock it usually signals either a decline the earning power of the inability to borrow.”

Moreover there are a number of considerations/factors that affect the dividend policy of the firm in practice. These are discussed below, in brief.