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Discuss the effect of the following concepts on the firm's dividend policy: (i) Clientele effect (ii) "Homemade" dividend.

      

Discuss the effect of the following concepts on the firm's dividend policy:
(i) Clientele effect
(ii) "Homemade" dividend.

  

Answers


Kavungya
(i) Clientele effect
- Assumes that there is a tendency for him to attract investors who like the firm’s dividend
policy. Therefore investors who desire current investment income would purchase shares
in high dividend payout forms.
- Change in prices after dividend announcement is thus due to demand and supply forces
occasioned by the investors keen on benefiting out of dividend announcement
- The implication of the dividend-clientele effect on dividend policy is that firms establish
dividend policies that they deem would contribute to wealth maximization.
- The shareholders who do not like this policy sell their shares to those keen on driving
dividend benefit.
- On the other hand, because of high switching costs (exit and entry) management is forced
to establish dividend policies that meet investors.
- Investors who want current investment income should own shares in high dividend
payout firms, while investors with no need for current investment income should own
shares in low dividend payout firms.

(ii) Homemade dividend
- Refers to ability of stock holders to liquidate part of their holding hence realize cash
inflow in lieu of dividend income.
- Implication of homemade dividend is that dividend policy is irrelevant and the argument
is that paying or not paying dividend has a capital gain effect: paying dividends lead to an
appreciation in stock values when dividends are not paid, stock prices fall.
- It is possible for investors to create homemade dividends thus the firm may opt to pay
dividend and let investors to choose their own dividend policy. The firm can retain the
profits and plough them through re-investment or can buy back shares.
- It ignores the signaling effect that a declared dividend will name.
Kavungya answered the question on May 5, 2022 at 13:40


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