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A Blueprint for Corporate Governance by Fred Kaen

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CHAPTER 7

CORPORATE GOVERNANCE DIVIDEND ISSUES

INTRODUCTION

Why do firms pay cash dividends? Why do firms that pay cash dividends follow what is called a constant dollar growth rate policy whenever possible? And, most important, what is the connection, if any, between cash dividends, dividend policy, and corporate governance systems?

The thinking of financial economists about dividend policy and why firms pay cash dividends has evolved in much the same way as their thinking about financing the company. Initially, economists focused on whether any connection existed between dividend policy and the firm’s cost of capital or, which is essentially the same thing, its market value. This analysis was carried out under the same perfect capital market ...

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