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2.2.6.Dividend Payout Ratio
Dividend Payout Ratio is a measure of how much percentage of the earning of
a
particular fiscal year to be distributed to shareholder. The formula is given:
The more earnings are paid out as dividend, the less the retained earnings. The
retention
of
earning
is
not
without
cost
because,
as
DeAngelo
et
al.
(2006)
coined,
‘agency cost of
free cash
flow’ does exist. Shareholders would want
the
earnings
to
be distributed when the firm reached maturity, while at the same time, managers want
to
pursue
more
growth
(which
led
to
over-investment).
Research
by Mueller
(1972)
did conclude this conflict of interest between manager and shareholder.
2.2.7.Subsequent Earning Growth
According to Black (1976),
managers are
less
likely to cut dividend payouts.
Black
argued
that
managers
only raise
the
dividend
payout
when
the
prospect
of
supporting higher
dividend
payout
in
the
future
is
good
enough. This
way, dividend
policy conveys
information on
whether
there’ll be
higher
subsequent earnings
growth.
Subsequent earnings growth can be formulated as:
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