Dividend policy determinants: Literature review and research model proposal

Abstract

This article aims to present the evolution of the theoretical framework of dividend policy from irrelevance theory to the life cycle theory and try to suggest a research model on the basis of various empirical studies carried in several financial markets. Indeed, several theories have tried to explain the choices of dividend policy made by firms and have presented the main determinants of dividend policy. Thus, the various theories presented in this article which are the "Bird in hand" theory, the irrelevance theory, the signal theory, the agency costs theory, the life cycle theory and the residual theory have all attempted to analyze the dilemma of paying dividends or keeping internal funds for other use. Each of these theories attempted to provide an explanation to justify dividend policy choices made by firms. It should also be noted that this decision is crucial both for the investors, and more particularly shareholders, and for the managers of the company, hence the interest of analyzing the evolution of dividend policy theoretical framework. Furthermore, this article will present the results of some empirical studies conducted on the determinants of dividend policy. Thus, several determinants of the dividend policy have been empirically tested in different financial markets such as profitability, free cash flow, company’s size and age, growth opportunities and reports. This review of the literature will thus allow us to propose a research model in order to be able to identify the main theories which explain the choices of payment of dividends by mobilizing different variables to be tested.

Keywords: dividend policy, signal theory, information asymmetry, agency costs, life cycle theory.

Classification JEL: G35

Paper type: Theoretical Research