Dividend Policy: Types, Theories and Key Concepts | Learnsignal
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Whether a company pays dividends or hoards cash is one of finance's oldest debates — and the answer hinges on theories that challenge everything you think you know about shareholder value.
Modigliani-Miller TheoremBird-in-the-Hand TheorySignalling TheoryAgency Theory
Theory Briefing
- The Modigliani-Miller theorem argues dividend policy is irrelevant to firm value in perfect markets, because investors can create their own 'homemade dividends'.
- Bird-in-the-Hand theory counters MM, suggesting investors prefer certain dividend payouts today over uncertain future capital gains.
- Signalling theory frames dividend changes as powerful messages to the market — a cut signals distress, a raise signals management confidence in future earnings.