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11
2.1.3.Theories and Empirical Evidence
Miller 
and 
Modigliani 
(1961) 
came 
up 
with 
their 
dividend 
irrelevance
theories.
This
theory
said
that
dividend
policy is
irrelevant
under
perfect
market.
Perfect 
market 
as  defined  by  Keown, 
Martin,  Petty  and  Scott  (1999): 
(1) 
no
transaction cost, investors can purchase or sell stocks without any
fees and companies
can
issue
debt/equity
without
any
cost;
(2)
no
information
asymmetry
between
the
outsider and
insider of the
firm; (3)
no
financial distress and bankruptcy cost; (4)
no
taxes; and (5)
no
conflict of
interest between
shareholder and
managers/agency cost.
Thus
the
value
of
a
firm
is
independent
from
any
dividend
policy made
by the
management.  However,  the
limitation  to  this  theory
is  that,  market  imperfection
exists.
Currently most
countries
have
taxes
regarding
dividend
and
capital
gain,
transaction
cost
also
exists,
and
information
asymmetry
does
exist
between
insider
and outsider of the firm.
In
their study with data
from NYSE,
AMEX, and NASDAQ
firms, Fama and
French
(2001) conclude that
firm
size
and profitability positively
influences
dividend
payments
while
market
to
book
ratio
negatively influences
dividend
payment.
In
another
study,
DeAngelo,
DeAngelo,
and
Stulz
(2006)
found
that
ratio
of
Retained
Earning
to
Shareholder’s
Equity
(RE/TE)
positively influence
the
propensity to
pay
dividend.
The RE/TE
variable
is
used
to
measure a
firm’s
maturity,
which
higher
Retained Earnings in the equity is an indicator of higher firm maturity.
Wurgler
and
Baker
(2004)
proposed
another
theory which
uses
market
characteristic
to describe dividend payment.
The theory
is called Catering
Theory of
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