6 Dividend Policy S. KEANE One of the great puzzles in finance is determining the effect of the Jirm’s dividend policy on share prices. Despite the widespread belief in the desirability of a positive dividend policy, the balance of economic logic, supported by some empirical evidence, suggests that dividend payments may be contrary to shareholders’ interests. Introduction Given that the value of a share is generally defined as the capitalised value of its stream of future dividends, it is difficult to resist the notion that dividend policy could be anything other than central to shareholders’ welfare. It is important, however, to distinguish between the actual dividend payment and the firm’s dividend policy. There is no dispute that any cash received by shareholders is a potentially significant component of their wealth. The issue is whether the pattern of cash payments issuing from the company is impor- tant to shareholders, that is, whether one pattern is superior to another. Consider the basic dividend valuation model which will be developed more fully in Chapter 15: dividend expected at end of period 1 price of share today cost of equity capital g = the annual growth rate of dividends It is evident from this simple valuation model that an increase in dividend will lead to an increase in the value of a share only if (a) there is no 16DIVIDEND POLICY i corresponding decrease in g, the growth rate of future dividends; or (b) if g does decrease, the change of dividend leads to a reduction in k, the required return by investors. It is obvious that a firm’s growth rate is at least partially affected by the amount of profit it retains and therefore it is possible that an increase in the payout ratio is simply matched by a proportional decline in the subsequent rate of growth. It is also clear that shareholders’ required return is likely to be predominantly determined by the perceived riskiness of the company’s investments and, since the fundamental riskiness of its investments is unlikely to be affected by the pattern of the company’s dividends, it is possible that k, the required return, is unaffected by the payout ratio. Looked at from this fairly simple model, therefore, the idea that a positive dividend policy is necessarily good for shareholders begins to appear less compelling. Whether dividend policy matters when the complexities of the real world are con- sidered is the issue with which this chapter is concerned. In practice, of course, it has to be recognised that, when deciding its annual or half-yearly dividend payout, management may not explicitly con- sider many of the fundamental issues about to be discussed. The directors will frequently be influenced by a number of factors which, although impor- tant in themselves, are relatively peripheral in nature, namely, factors such as the firm’s liquidity, or any creditor and legally imposed restraints on distribution, or government policy. These are not issues which will be con- sidered in the present chapter: the primary focus will be on the fundamental role of dividend policy under conditions where management has total freedom to choose. There are three theories about the role of dividend policy: first, dividend Policy is irrelevant to the value of a company’s shares; second, an optimal dividend policy enhances the value of the shares; and finally, dividend Payments diminish the value of the shares. The Irrelevance of Dividend Policy Notwithstanding the intuitive appeal of the widely accepted belief that the dividend payout ratio is important to shareholders, there are powerful arguments for believing that under ideal market conditions the firm’s divi- dend pattern is of little consequence to share prices. It is perhaps not surprising that the dividend irrelevance school is mainly associated with Miller and Modigliani (1961) (hereafter abbreviated to MM), who, it will be recalled, had in an earlier paper argued in support of the irrelevance of the firm’s financing decision. Under perfect market condi- tions, where there are no taxes or transaction costs, they had concluded that a firm’s value is determined solely by its investment portfolio and not by the manner of its financing arrangements. The extension of this conclusion to the dividend context is not difficult to understand when one considers thatB S.KEANE the decision to retain profits as a method of financing new projects is simply the obverse of the dividend decision. If it is true that it is a matter of indif- ference whether firm’s investments are financed by debt or equity, it would seem to follow a fortiori that it is a matter of indifference whether they are financed by one type of equity rather than another, that is, whether retained profits or a new issue are used. To the extent that the dividend is merely a residual of the retention decision, there is reason to believe that the pattern of payout is irrelevant under the same set of perfect market assumptions postulated for the capital structure theorem. Home-made Dividends This irrelevance view of dividends is supported by an important principle that emerges from both MM studies: a principle which now permeates finance theory, namely, that the market will not attach a value to any cor- porate financial policy where the effect is one which an investor could just as readily achieve for himself, Hence, in capital structure theory, the idea that corporate leverage might increase the value of the firm is rejected on the principle that the investor could engage in home-made leverage. In capital market theory the notion that corporate diversification might increase the value of the firm is rejected on the grounds that the investor can more effec- tively diversify away risk through his own portfolio. By the same token, the w that a particular dividend policy might enhance the value of the firm is difficult to defend as long as investors can costlessly create their own divi- dend stream from the capital value of their shares (enhanced, of course, pro- portionally by retention). There has not really been any successful challenge to MM’s position within the context of their perfect market assumptions. Numerous arguments, of course, have been presented to support the view that in an imperfect world dividends do matter, and these will be considered in some detail in the next section. Some of these arguments are occasionally advanced as valid attacks on dividend irrelevance even in a perfect world, but it is not difficult to demonstrate that each depends on the existence of some imperfection. For example, there have traditionally been three principal arguments in support of dividend relevance: (a) investors need current income; (b) investors prefer the certainty of cash in the hand to an equivalent amount retained in the company; and (c) dividend announcements have important information content about management’s expectations of the future. Whatever validity these arguments might have in the real world, itisa fact that each is wholly dependent on the existence of some market imperfec- tion. The need for current income depends on the existence of some obstacle which prevents investors from costlessly creating their own dividend stream. The reduction of uncertainty implies that investors mistakenly perceive new projects which are financed out of retained earnings to be inherently more risky than if financed out of a new issue. The view that dividends conveyDIVIDEND POLICY 9 useful information implies the existence of a defective financial reporting system in non-dividend-paying companies. It is difficult to resist the conclu- sion, therefore, that if dividend policy matters to investors, it is because of one or more imperfections in the market. Clientele Theory There are, in fact, two arms to the dividend irrelevance argument. The primary thrust of the argument is, as we have seen, the fact that shareholders can create home-made dividend streams out of the capital value of their shares. The second arm of the argument attempts to deal with some of the market imperfections which will shortly be considered. Even if investors do have specific income needs, whether because of individual consumption preferences or because of taxes etc., and even if, as a result of transaction costs, they are unable to create their own dividend streams costlessly, it is possible that each company might attract a specific clientele for whom the particular payout policy would be appropriate. With such individual clienteles there is no reason to believe that any particular policy is intrinsically superior to another. Arguably, all that matters for a firm is that it should establish a policy that makes sense in relation to its investment funding needs and that it should adhere to the policy as far as possible. Clearly, it is a mat- ter for empirical research whether such a clientele effect does exist and is suf- ficient to dispose of the arguments that follow. Dividend Policy at the National Level Finally, before proceeding to the next section, it is worth noting that a par- ticular dividend pattern may be desirable at the aggregate level without it necessarily being important that any particular company adhere to the pat- tern. It could be argued, for example, that retention of profit is generally desirable because it encourages new corporate investment, whilst dividends tend to encourage the consumption of wealth, But it can equally be argued that an optimal allocation of resources would more likely be attained if com- panies were compelled to distribute all profits, and so allowed to let the investment community rather than individual managements make the alloca- tion decisions. These larger considerations, however, are outside the scope of the present chapter, and the following discussion is limited to the implica- tions of dividend policy at the firm level. Factors that Favour High Payout Traditional support for a positive dividend policy appears to be rooted in the belief that dividends are intrinsically beneficial to shareholders. On the80 S. KEANE premise that the market value of a security is a function of two variables, risk and return, it follows that, for a positive dividend policy to be desirable per se, such a policy must be shown to be capable either of reducing the security’s risk or of increasing its expected return. Bird-in-the-hand Quality of Dividends versus Capital Gains It appears to be inherent in the conventional viewpoint that a dividend now is preferable to higher future dividends resulting from retention and one explanation offered has been that retention carries more risk than cash in the hand (Gordon 1959). This argument, however, appears to spring from a con- fusion between the firm’s investment and financing decisions. The risk associated with retained earnings is, as with any other source of finance, determined by the risk of the underlying investments undertaken by the firm, and an investment financed by retained earnings carries no more risk than if it were financed by a rights issue (the normal equity alternative to retention). Indeed, the logical conclusion of the ‘bird-in-the-hand fallacy’ is that cash (non-investment) is preferable to investment. It ignores the fact that the pro- cedure for evaluating an investment takes account of the investment’s risk, which is independent of the source of finance. The other aspect of the alleged risk-reducing properties of dividends is that, since risk is a function of the variability of the returns on a security, it might seem possible for a company to reduce the investor’s risk by pursuing a stable slowly-growing payout policy. To the extent that dividends form a major component of the investor’s return, it would seem that the shareholders’ risk would be that much less with a stabilised dividend than if the company allowed the payout to vary with earnings. But controlling risk is not that simple. A stable dividend policy necessarily increases the variability of the firm’s residual earnings and, if market prices behave rationally, the effect should be to make the shares of stable dividend companies with variable earnings proportionally more variable than the shares of companies whose dividends vary with earnings. As a result, the variability of the total returns to the shareholder (the dividend and capital gain package) should be the same under each policy. Dividends as a Source of Current Income The second argument is that dividends are necessary to satisfy investors’ cur- rent income needs. The implication is that dividends as an income source have a different quality from income created out of the capital gains resulting from retention. The notion that capital and revenue sources of income are different in kind receives support in several contexts, e.g. in taxa- tion, in trust law, and, of course, in the Companies Acts’ definition ofDIVIDEND POLICY 81 distributable profit. However, these special situations give no rational foun- dation for believing that £1 in dividends is intrinsically superior to £1 of capital growth converted into cash. The ultimate logic of the belief that divi- dend income is of a superior quality is that, ceteris paribus, firms ought to distribute their entire income. Brokerage Costs The existence of brokerage costs implies that investors with particular income preferences in fact cannot costlessly create their own dividend stream from capital gains. Hence, it may appear desirable for some companies to establish a high dividend payout to satisfy this clientele, but this does not necessarily mean that the value of such companies will be any higher as a result. In addition, the argument is partly offset by the fact that investors in receipt of dividends, who do not wish to consume their income, will incur brokerage costs in reinvesting their funds. It remains an open question, therefore, whether the possibility of forming clienteles is sufficient to negate the effects of brokerage costs. Information Content of Dividends It has long been recognised that a dividend may have significance not for what it is but for what it implies. Indeed, one of the great obstacles encountered by researchers in their effort to track down the impact of divi- dend policy on security prices is the information effect of dividends. Even if the dividend payment itself has no actual effect on share prices, the dividend pattern may be associated with changes in investors’ perceptions of the firm’s value. The information aspect has two dimensions: (a) Management uses dividend increases as a signalling device to com- municate its own revised expectations of the company’s future prospects, with the result that increases in dividends tend to be associated with higher returns. (b) The information-disclosure package associated with a ‘high dividend and new equity financing’ policy tends to be superior to that associated with a ‘low dividend and retained earnings financing policy’, given the pressures exerted on new equity financing by disclosure-regulatory agencies. The former package, therefore, is likely to create less uncertainty amongst in- vestors about future prospects and, as a result, the market’s perception of investments financed by retained earnings may be less well defined than those financed by new issues. It has to be stressed that this is a matter of perception only, and that the actual risk of the underlying investment is unaffected by the type of equity used to finance it. However, it is possible82 S. KEANE that, for companies whose financial reporting practices are defective, the payment of dividends adds credibility to their earnings statement. The power of dividend policy to serve as a vehicle for transmitting infor- mation to the market can be assumed to vary between one company and another. Companies whose share returns are highly correlated with general market movements are less likely to have their dividend increases interpreted as implying an unexpected improvement in future prospects than companies whose returns are highly individualistic and whose share prices depend more on company-specific events than on economy-wide factors. The latter type of company is frequently difficult to evaluate and any signal from manage- ment, with its superior information base, may provide potentially important insights into the firm’s future prospects. Investment Policy Implications The conventional wisdom appears to favour a steady growth pattern in dividends. The effect is to foster relatively low payout ratios during periods of abnormally high profitability to maintain the subsequent chances of achieving a smooth growth pattern. One result of this may be to induce less rigorous attitudes to the investment of earnings retained within the com- pany, and to lead some managers to view retained earnings as no more than the residual of their dividend policy. If the consequence is to promote a more casual attitude to the use of funds derived from retained earnings than to funds that have been subjected to the rigours of external equity financing, then high dividends may be associated indirectly with a more efficient use of funds. These investment policy implications may also have market-wide significance. Some writers have argued that high payout policies, enforced by legislation if necessary, could generally lead to more efficient allocation of capital on the premise that management cannot be wholly trusted to effect the allocation as efficiently as the market. A relatively high payout, therefore, may be perceived by the financial community as a corporate responsibility towards the efficient operation of the market system. Wealth Redistribution Effects It can readily be demonstrated that, even if no particular debt—equity mix is optimal, unanticipated changes in capital structure can have adverse effects on shareholders’ wealth. To the extent that dividend policy can contribute to such changes, dividends must be perceived as relevant to the potential con- flict between debt holders and equity holders. A high retention policy increases the ratio of equity to debt, resulting potentially in wealthDIVIDEND POLICY 83 redistributions in favour of the firm’s debt holders. Ceferis paribus, therefore, unexpected retention of earnings can operate against the interests of shareholders. Factors that Favour Low Payout Taxation The principal factor that militates potentially against a high payout policy is the existence of differential tax rates for dividends and capital gains. Some writers (Brennan 1970) have argued that, as a consequence of the marginal rate of tax being greater for dividends than for capital gains, dividend- paying companies will be priced lower than earnings-retaining companies, with the result that the former will have to earn higher gross rates of return. The capital asset pricing process, in effect, operates on an after-tax basis and, therefore, investors will seek higher gross returns from high-yielding securities. This differential tax effect is likely to be more marked under the classical tax system operating in the US than under the imputation system operating in the UK. In addition, the tax penalty has to be viewed in the con- text of the potential clientele structure previously discussed. High-dividend- paying shares may be sought by low tax payers. The differences between the UK and the US tax environments are impor- tant in this respect. The present imputation system of corporate taxation in the UK was designed specifically to eliminate the classical system’s discrimination against dividends. Under a fully operative imputation system discrimination virtually disappears for the basic-rate taxpayer and, therefore, much of the debate in the US, where the classical system operates, might appear to have little relevance to this country. However, the actual situation in the UK is far from simple and the tax problem is even more intractable than in the US. A large proportion of UK companies experience tax exhaustion, that is, they have a surplus of capital allowances or losses carried forward over taxable profits. The 1982 Corporation Tax Green Paper reported that 37 per cent of all industrial and commercial companies rarely, if ever, pay mainstream corporation tax; 33 per cent pay tax on an irregular basis, and only the remaining 30 per cent consistently pay tax. The effect on a company experiencing permanent tax exhaustion is that the imputation system operates in the manner of the classical system, restor- ing the full discrimination against distribution. For companies paying tax on an irregular basis, the effect will vary depending on the uncertainty of future income and allowance streams. In summary, the presence of tax exhaustion in the UK, in either its permanent or periodic form, makes it difficult to assess the importance of the differences between the UK and US environments.84 S. KEANE Wealth Redistribution Effects Just as it is against the interests of equity holders that the retention of earn- ings be allowed to alter the proportion of debt to equity in such a way as to effect a wealth redistribution in favour of debt holders, so will there be pressure by debt holders to ensure that the countereffect does not result from unexpected increases in dividends. Some leveraged companies may, therefore, in their covenants with debt holders, be subject to restrictions with respect to dividend increases. Flotation Costs of New Issues Prima facie, it appears to make little economic sense to issue dividends in years when the firm otherwise has to incur the costs of raising external funds to finance new investments; yet this is a common phenomenon. Indeed, in the mid-seventies, the UK government imposed a restriction on dividend increases, but one of the few exceptions specified was for companies propos- ing to have a rights issue. This practice of increasing the dividend payout to promote a new issue of shares, and the government’s apparent endorsement of it, clearly implies a widespread belief in the benefits of dividends, and a belief that the associated taxation penalties and flotation costs are worth- while economic trade-offs. The Empirical Evidence Tests of dividend relevance have always proved difficult to design and con- duct because of the many factors that come into play; and the evidence that is available tends to be associated with intense academic controversy. The results over time have shown a gradual shift from supporting the view that dividends increase wealth to the view that dividends are a matter of indif- ference and possibly even reduce shareholders’ wealth. Early studies by Walter (1956) and Gordon (1959) indicated that dividends do increase value and are preferred by investors to capital gains. Friend and Puckett (1964) later criticised the methodology employed in these early studies and, using improved techniques, found that dividends appear to enhance value for non-growth companies and reduce the value of growth companies. Later, Black and Scholes (1974) argued that all previous studies were defective because they were written before CAPM was developed. Their researches indicated the absence of any relationship between dividend yield and expected return, suggesting that share values were largely unaf- fected by dividend policy, even given the tax differential between dividendsDIVIDEND POLICY 85 and capital gains. Some recent studies, however, such as Auerbach (1983) and Litzenberger and Ramaswamy (1979, 1980, 1982) have found evidence of a tax effect, with a premium being required when returns are received in the form of dividends. Litzenberger and Ramaswamy (1979), for example, found that a firm with a dividend yield of 6 per cent could, under the tax regime operating in the US, raise its market value by more than 10 per cent by eliminating dividends. An alternative view is presented by Miller and Scholes (1981) who maintain that these results could be attributed to the in- formation effect of dividends. A later paper by Litzenberger and Ramaswamy (1982), however, built upon their previous econometric pro- cedures to answer these criticisms and found that, even allowing for the information effects, a relationship between tax and yield was present. Until recently, the evidence relating to dividends and taxes in the UK was very scant, and it was not clear to what extent the findings in the US were relevant to the UK tax environment. However, a recent study by Poterba and Summers (1984), using UK data, appears to confirm the view that taxes do affect the market’s valuation of dividends. The study sought explicitly to take advantage of the fact that over the last 30 years there were two radical changes in Britain with respect to the taxation of dividends versus capital gains: the introduction of capital gains tax in 1965 and the introduction of the imputation system in 1973. These changes allowed the effects of tax to be studied under three tax regimes in the UK. It was argued that, if tax does affect the valuation of dividends, it should be possible to observe variations in valuation over the three regimes and, given that the problems of informa- tion effects and risk mismeasurement are common to all tax regimes, any observed variations could be assumed to be relatively uncontaminated by these effects. Poterba and Summers found that there was a significant change in the yield effect following the introduction of the imputation system, thus providing strong support for the US evidence for the relation- ship between dividend yields and stock market returns. It was also apparent that the market explicitly recognised the lower tax penalty attached to dividends under the imputation system compared to the classical system operating in the US. Bonus Shares One solution that has been suggested to the dividend problem is for the firm to issue bonus shares. The relevance of bonus shares, sometimes called free shares or scrip issues, is perhaps more readily appreciated from the US term, stock dividends. These are shares issued free to the shareholders in propor- tion 10 their existing holdings. It is sometimes suggested that an issue of free shares is a valid alternative to a cash dividend on the principle that, where86 S$. KEANE dividends might have been, say 10 per cent, with a 1 for 10 issue the investor obtains an extra 10 shares for every 100 previously held, and can use the new shares to create his desired dividend stream, whilst at the same time retaining his original holding. This solution, however, ignores the fundamental fact that ‘free’ shares have no real economic significance for shareholders (other than to achieve a more acceptable sound to the dividend — for example in negotiating with labour, where it happens to be the custom to express the dividend as a percentage of the par value of a share). It is therefore of no significance to a shareholder whether he owns 100 shares each worth £1.10, or 110 shares each worth £1.00. If he wishes to generate his own home-made dividends it is a matter of indifference to him whether he sells approximately 9 shares in the first instance or 10 shares in the second. The facility of having new shares to match every pound of distributable profit would be of significance only to shareholders who perceive a fundamental difference be- tween capital and revenue, and who define ‘capital’ in terms of the number of shares purchased rather than the aggregate amount of equity invested. The effect of a scrip issue would be somewhat different if the shareholder were given the choice between a cash dividend and a scrip. In these cir- cumstances, the scrip does have economic significance to the investor because the additional shares represent his increased share of the ‘cake’ in relation to those investors who elect for a cash dividend. This solution, however, has been used in the UK and the tax authorities have treated the scrip under these circumstances as equivalent to a distribution of income for tax assessment. Conclusion Having examined the market imperfections which might give some relevance to dividend policy, whether for or against shareholders’ interests, it remains unclear whether the net effect is to alter the fundamental view of dividend irrelevance derived under perfect market conditions. As Jong as a company faces growth opportunities it appears to make economic sense that retained earnings should be the primary source of new equity financing, particularly if the payment of a dividend has clear tax disadvantages, such as under the classical tax system or, under the imputation system, if the company suffers from tax exhaustion. In addition, empirical evidence in the US and the UK supports the view that where there are tax penalties associated with dividends, dividend payments tend to reduce rather than increase shareholders’ wealth. But it is premature nonetheless to recommend that companies adopt the logical step of abandoning dividend payments entirely. Whilst empirical evidence has to be recognised as the final arbiter in the debate, the evidence currently available is arguably too recent and too uncer- tain to command total conviction.DIVIDEND POLICY 87 Even if firmer evidence is obtained testifying to the undesirability of dividends, it is not a light matter for companies to decide to abandon divi- dend payments. Although the key benchmark for evaluating any corporate policy in a theoretical framework is the effect on the share price, it will never be a simple matter for investors directly to observe the relationship between the dividend decision and the effect on security prices. The association has eluded researchers for decades. Because of this, management and investors frequently base their assessment of financial success on surrogate bench- marks such as the firm’s dividend paying capacity, which rightly or wrongly has come to play a prominent role in the assessment process. Dividend payments may in effect be generally viewed both by shareholders and management as a symbol of management’s wealth-creating capability. If they are ultimately confirmed to have negative price effects, an alternative symbolism will doubtless evolve. But until the share price effects are widely and clearly acknowledged by the investment community, management will understandably be reluctant to defy the existing symbolism. Resolving the debate in the research literature is not in itself enough to diminish the impor- tance of dividend payments as a factor in management shareholder relationships. In conclusion: there are strong reasons for believing that the taxation implications of dividend policy may under certain circumstances outweigh any positive aspects of dividends and, even in the context of a clientele struc- ture in shareholder ownership, it would appear advisable for growth com- panies, certainly those in the tax exhaustion category, to bias their policy towards low payout ratios. But it is too early in the debate to advocate the ultimate logic of abandoning dividend payments altogether. There is, however, one relatively clear decision rule that emerges from the debate. Whatever payout ratio the firm does adopt, it should announce its policy clearly and, unless it elects to abandon dividends entirely, it would seem desirable to strive after a stable, slowly growing pattern on the principle that, if companies do attract investor clienteles, an unpredictable payout stream is unlikely to appeal to any group seeking to plan its income preferences or its taxation strategy. References and Further Reading Auerbach, A. (1983) Stockholders’ tax rates and firm attributes’, Journal of Public Economics, July, pp. 107-127. Black, F. and Scholes, M. (1974) ‘The effects of dividend yield and dividend policy on See stock prices and returns’, Journal of Financial Economics, May, pp. 1-22. Brennan, M. (1970) ‘Taxes, market valuation and corporate financial policy’, National Tax Journal, December.88 S. KEANE De Angelo, H. and Masulis, R.W. (1980) ‘Optimal capital structure under corporate and personal taxation’, Journal of Financial Economics, March. Friend, I. and Puckett, M. (1964) ‘Dividends and stock prices’, The American Economic Review, pp. 656-682. Gordon, M. (1959) ‘Dividends, earnings, and stock prices’, Review of Economics and Statistics, May, pp. 99-105. Jensen, M. and Meckling, W. (1976) ‘Theory of the firm managerial behaviour, agency costs and ownership structure, /ournal of Financial Economics, October. Litzenberger, R.H. and Ramaswamy, K. (1979) ‘The effects of personal taxes and dividends on capital asset prices: theory and empirical evidence’, Journal of Finan- cial Economics, Vol. 7, pp. 163-195. Litzenberger, R.H., and Ramaswamy, K. (1980) ‘Dividends, short-selling restrictions, tax-induced investor clienteles and market equilibrium’, Journal of Finance, Vol. 35, pp. 469-482. Litzenberger, R.H. and Ramaswamy, K. (1982) ‘The effects of dividends on common stock prices, Journal of Finance, Vol. 37, pp. 429-444, Miller, M. (1977) ‘Debt and taxes’, Journal of Finance, May. Miller, M. and Modigliani, F, (1961) ‘Dividend policy, growth and the valuation of shares’, The Journal of Business, October, pp. 411-433. Miller, M. and Scholes, M. (1978) ‘Dividends and taxes’, Journal of Financial Economics, Vol. 6, pp. 333—364. Miller, M. and Scholes, M. (1982) ‘Dividends and taxes: some empirical evidence’, Journal of Political Economy, Vol. 90, December, pp. 1118-1141. Modigliani, F. (1982) ‘Debt, dividend policy, taxes, inflation and market valuation’, Journal of Finance, May. Poterba, J. and Summers, L.H. (1984) ‘New evidence that taxes affect the valuation of dividends, Journal of Finance, December, pp. 1387-1415. Walter, J. (1956) ‘Dividend policies and common stock prices, Journal of Finance, March, Warner, J. (1977) ‘Bankruptcy costs: some evidence’, Journal of Finance, May. Weston, J.F. (1963) ‘A test of capital propositions’, Southern Economic Journal, October.