12
Dividends,
stating that
dividend
policies
are
based
on
the
investor’s
demand.
When
investors
are valuing dividend-paying firms
higher
than
non-dividend-paying,
the
managers will
initiate dividend payment, and
vice
versa. Further studies by Wurgler
and
Baker
(2004)
also
found
an
interesting
fact
that
the
propensity to
pay
dividend
decrease
when
there’s
growth
stock
booming
(in
times
of
new
technology ages,
for
example).
The
propensity
to
pay
dividends
also
increases
after
the
bust
of
those
stocks
(when
the
market
values
mature
firms
more
than
growth),
thus
confirming
their theory. This research did provide answer to several questions
laid out by Black
(1976) regarding how the companies can be certain on what the shareholders want.
In 1972, Mueller proposed firm life cycle theory. According to Mueller, a firm
was created
to exploit
the 'Schumpeterian
innovation'
involving new products,
process, marketing or organizational techniques. If the innovation proves to be viable,
the firm will expand. The idea would get proven and uncertainty around it would start
to diminish. During this growth period, shareholders
would
want all capitals and also
probably all
the profits are
reinvested
to take advantage of
the
new
idea. It
may also
need
to
raise
more
capital
from
outside
to
capitalize
the
idea to
wider
market.
Competition will start and flourish; as it does, the company will begin to improve and
new innovation to the product adopted. The market will eventually saturate and profit
opportunity
begins
to
decline.
In
this
period
the
shareholders
would
not
advantage
from
reinvestment
because
profit
opportunities
declines.
A
stockholder
maximizing
manager
would
pay more
dividends
rather
than
reinvest
it.
The
life
cycle
theory
suggests
that
the
more
mature
the
firm,
the
more it
pays
dividend.
As
the
theory
suggests, higher proportion of the retained earnings
will
indicate a more
mature firm.
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