This week my Corporate Finance class were looking at corporate dividend policy. Two recent news items highlight the centrality and importance of the dividend decision.
First, last week’s Economist argued that Apple should return to investors the $100b of cash it has on its balance sheet (click here). One theory is that Apple seems to fear that the act of returning cash to shareholders may signal to the market that its best days are behind it. Another theory is that the near-bankruptcy experience of Apple in the 1990s meant that Steve Jobs had a strong preference for hoarding cash. This may be an example of where managerial traits and experiences affect corporate policy.
Second, a report by a Research Fellow at the American Enterprise Institute suggests that the Obama administration plans to increase dividend taxes from 15% to 45%, the highest in 27 years. A study by Chetty and Saez shows that the Bush dividend tax cut of 2003 resulted in more firms paying dividends and dividend payers paying higher dividends. For some observers, this greatly improved corporate governance as managers had less free cash flow which could be diverted towards pet projects or perquisites.