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Financial Managements 223 their earning potential has gone way of dividends. As compared up and not just the earnings of to this, higher dividends may be the current year. In other words, declared if tax rates are relatively dividend per share is not altered if lower. Though the dividends are free the change in earnings is small or of tax in the hands of shareholders, seen to be temporary in nature. a dividend distribution tax is levied (d) Growth Opportunities: Companies on companies. Thus, under the having good growth opportunities present tax policy, shareholders retain more money out of their are likely to prefer higher dividends. earnings so as to finance the (h) Stock Market Reaction: Investors, required investment. The dividend in general, view an increase in in growth companies is, therefore, dividend as a good news and smaller, than that in the non– stock prices react positively to it. growth companies. Similarly, a decrease in dividend may have a negative impact on the (e) Cash Flow Position: The payment of dividend involves an outflow of share prices in the stock market. cash. A company may be earning Thus, the possible impact of profit but may be short on cash. dividend policy on the equity share price is one of the important factors Availability of enough cash in the company is necessary for considered by the management declaration of dividend. while taking a decision about it. (f) Shareholders’ Preference: While (i)Access to Capital Market: Large and declaring dividends, managements reputed companies generally have must keep in mind the preferences easy access to the capital market of the shareholders in this regard. If and, therefore, may depend less the shareholders in general desire on retained earning to finance their growth. These companies that at least a certain amount is paid as dividend, the companies tend to pay higher dividends than are likely to declare the same. There the smaller companies which have are always some shareholders who relatively low access to the market. depend upon a regular income (j)Legal Constraints: Certain from their investments. provisions of the Companies Act (g) TaxationPolicy:The choice between place restrictions on payouts as dividend. Such provisions must the payment of dividend and retaining the earnings is, to some be adhered to while declaring the extent, affected by the difference in dividend. the tax treatment of dividends and (k) Contractual Constraints: While capital gains. If tax on dividend is granting loans to a company, higher, it is better to pay less by sometimes the lender may impose Reprint 2026-27