Why Do Firms Pay Dividends?: A Literature Review

Dividend policy is one of the most long lasting issues in modern corporate finance. Decisions regarding dividend payout and retention are mainly relies on the dividend policy of the firm. Stock price of the firm also affected by payout ratio. Numerous studies have been conducted to unearth the answer to the question of why firms pay dividend? Several Factors like operating cash flows, tax, information asymmetry, agency conflict, firm size affects the dividend decisions. This study will help to gain deep understanding of existing literature relating to the dividend payout policy and its determinants. It aims at providing an understanding of the previous research work done on dividend payout policy by various researchers. For this purpose several numbers of studies, conducted within a time period of 1980 to 2014 has been reviewed. It is found that some factors are positively related with dividend payout and are affecting their stock prices in positive direction for one country while they are negatively related for other countries. Majority of studies revealed that dividend has positive relation with cash flow, transparent information environment and size of the firm. It is also found that dividend is inversely related to financial leverage, growth opportunity, level of asymmetric information and managerial ownership. While kai li(2008) concluded that information asymmetry has no relation with dividend. These factors should be considered by management while formulating dividend policies for their firms.