Impact of Dividend Policy on Share Price Research Paper

Impact of Dividend Policy on Share Price - Research Paper Example To understand the overall idea about the dividend policy, it is essential to categorize the policy. There are mainly two types of a dividend policy that is being followed by the corporate sector i.e. residual and managed. The residual dividend policy distributes cash among the shareholders. It is left after the business firm spends desirable amount for the purpose of investment, according to the NPV. The risk related to this dividend policy is very high due to highly variable in nature or it may be zero. On the other side, the managed dividend policy is mainly stressed to increase the return of the shareholders. The managers of the business firm who believe that dividend policy has a strong impact on the share price of firms. It generally uses this mechanism of dividend policy. The primary objective of this optimal dividend policy is to enhance the stock price trend of the business firm that results in maximization of shareholders’ wealth. Nowadays, the business firm relates the dividend policy with the product life cycle (PLC). For an example, a firm with large cash flow, high growth rate and lower trends in project appraisal tries to pay more dividends to the shareholder, as the earnings of the firm are comparatively high. The firms with high growth rate follow different interesting patterns in order to change the pattern of such decisions and enhance the complexity (Lease, 56). If the earnings of business firms are increased, then the dividend should increase too. On the other side, the dividend cut denotes the decreasing trend of earnings.