DIVIDEND

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The dividend decision is one of the most important decisions facing a corporation

How much of earnings given back to shareholders?

This is the same decision as how much of earnings should be retained

Distribution of cash is the final decision management must make

– The dividend decision returns resources to owners

Types of dividends

Cash dividends (either regular or extra) are cash distributions from earnings and are the most common

Liquidating dividend pay out all cash from sale of assets to end operations of the firm

Stock dividends (issuing new stock as a dividend) are like stock splits and are not really what we mean by dividends since no cash is paid

Institutional Details

Dividends are set by the board of directors and are paid to all recorded shareholders.

There are typically legal restrictions on dividends in order to protect bondholders from agency costs.

Otherwise, firms near bankruptcy could pay “liquidating” dividends from capital, essentially transferring wealth from bondholders to stockholders.