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.
