• 6. Why do Firms Pay Dividends?

    The previous section has shown that buybacks offer many advantages over dividend payments. Yet the empirical reality is that dividends are still very popular. Why is it that firms pay dividends? The purpose of this section is to find answer to that question. These answers include:

    • It could be that shareholders have a desire for current income
    • It could be that regular dividend payments help shareholders to impose self-control
    • Dividends could contain valuable information and therefore firms could use them as signals
    • There could be managerial agency costs
    • There could be special shareholder clienteles for which dividends are favorable
    • The market could desire dividends because alternative investments have low yields.
5. Dividends vs. Share Repurchases7. Towards a Payout Policy