Question

"Clientele effect, tax differential, agency cost and information asymmetries affect the dividend value percieved by investors". Express your views on this statement. Justify your answer citing appropriate examples from Suadi Firms. (150-200 words) You have to comment on two of your classmates.

Answer 1

Yes Cleintele effect, Tax differential, Agency Cost, Information asymmetries do affect the dividend value perceived by the customers. To understand the above statement let us understand the relationship of dividend with the given factor mentioned.

We know that the movement in stock price is related to demand and aspiration of investors. The overall change in tax, dividend or other policy may affect the price of share and hence the demand of investor. Clientele effect thus definitely plays an important role in dividend policy of company. The increased dividend payout may lead to increased demand of client and hence the increased share price.

However considering the fact that capital gains are taxed at lower rate than dividend and probability of equity appreciation is more than dividend the tax differential view plays an important role in driving the dividend policy. So dividend in such case can be retained and equity is preferred.

Agency cost on the other hand is cost that arises between management and shareholder, because of their own separate interest. An organization pays out dividend to mitigate this cost establishing inverse relationship between the two. Increased agency cost may than lead to reduced dividend payout.

Information asymmetry as the word suggest means there is an imbalance between parties in their knowledge of factors and details that drives decision making. To ensure we understand the profitability better, information asymmetry definitely ensures of one party having competitive advantage over other. So better insight of information would lead an investor to make more informed decision enabling them to earn more dividend or profit.