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decision for stocks investment. The bird-in-the-hand may sound familiar as it is taken
from an old idiom saying: "a bird in the hand is worth two in the bush." In this theory
"the bird in the hand' is referring to dividends and "the bush" is referring to capital
gains.
3) Tax Preference Theory
This theory is developed by Litzenberger and Ramaswamy (1979). The main
idea of this theory is that the main shareholders who have received most of dividends
prefer company to save the profit as retained earnings. Investors prefer capital gain
for the reason
tax of dividend is greater than tax of capital gain. In summary,
investors are more likely to choose the company that pay less dividend than
company that pay higher dividend.
4) Residual Theory
External funding ( i.e : the issuance of new stocks) is more expensive than the
internal funding ( utilitization of retained earnings), due to the stock emission costs
(Hall,2009). By the exitence of emmision costs, companies prioritize the internal
funding. As a consequence, dividend payment is done after companies have fulfilled
the financial need for investment. In the other words, companies out dividend
payment as their last priority when they have the residual funds. If the income is not
sufficient for financing company, then company will not pay the dividend. In
essence, residual theory assumed that the main funding of company is derived from
retained earnings. Based on this theory, companies with high growh tend to pay less
dividend than the companies with low growth.
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