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1 Dividend Puzzle fisher black (1976), Journal of Portfolio Management, 5-8 (reprinted in Smith) 1

2 Introduction: dividend puzzle dividend puzzle dividend dividend puzzle Why do corporations pay dividend? fisher black 1976 fisher black 30 why do corporations pay dividend? paper dividend dividend (1) dividend (2) dividend Appendix: paper paper <problem 1> A 1000 dividend 10% bond individual tax rate 28 percent corporation tax rate 34 percent <analysis> individual tax rate 28 percent is lower than 34 percent corporation tax rate dividend investor dividend dividend bond dividend individual tax rate is lower than corporation tax rate dividend <solve> (1) dividend 1000*(1-0.28)=720 2

3 * dividend individual tax rate * dividend bond 10 % investor 720 * ( * ( ))^5) = * investor 28 percent individual tax rate * dividend (2) dividend 10 percent bond 1000* ( * ( ))^5 )= * 34 percent corporation tax rate * dividend * ( ) = * dividend 28 percent individual tax rate * bond dividend problem dividend dividend analysis individual tax rate 28 percent is lower than 34 percent corporation tax rate, A in the firm term (1) when individual tax rate < corporation tax rate dividend (2) when individual tax rate < corporation tax rate dividend B in the investor term, paper (1) => dividend stock (2) => dividend stock dividend individual tax rate dividend 3

4 <problem 2> B 100 dividend repurchase individual tax rate 28 percent capital gain rate 20 percent <analysis> problem dividend repurchase dividend repurchase dividend repurchase dividend repurchase <solve> (1) 100 dividend 100* 0.28 = 28 dividend 28 (2) 100 repurchase repurchase investor 60 per share 100 per share ( )* 0.2 = 8 * individual tax rate capital gain rate * repurchase investor 8 per share repurchase dividend investor repurchase dividend IRS repurchase dividend repurchase dividend dividend Real-world Factors Forcing A High-dividend Policy dividend (1) Desire for Current income. investor NPV project 4

5 investor dividend (2) Uncertainty Resolution finance project NPV project dividend risk dividend (3) Agent Cost agent cost manager stockholder dividend shareholder manager dividend dividend dividend dividend Context (Dividend Puzzle): 5

6 paper paper the dividend puzzle dividend puzzle Why do corporations pay dividends? Why do investors pay attention to dividends? dividend dividend dividend puzzle The MM Theorem If a Firm Pays No Dividends Taxes Transaction Costs What Do Dividend Change Tell Us How to Hurt the Creditors Dividends as a Source of Capital Do Investors Demand Dividends Portfolio Implications dividend 9 dividend The Miller-Modigliani Theorem M-M M-M 1. no transaction cost 2.no taxes Case 1 A firm with dividend Case 2 A firm without dividend Case 1 2 dividend 2 dividend + new stock price = old stock price 6

7 old stock price = 50 2 dividend => new stock price = 48 dividend Dividend paid does not effect the value of its shares or the returns to investors Case 2 dividend dividend dividend M-M Taxes tax dividend MM model no tax individual tax rate > capital gain rate investor stock price capital gain rate > dividend tax rate investor corporation stock investor investor corporation capital gain rate > dividend tax rate investor individual tax rate > capital gain rate paper Corporation tax rate VS individual tax rate : individual tax rate individual tax rate corporation tax rate individual tax rate dividend in the investor aspect 7

8 dividend capital gains individual tax rate > capital gain rate dividend stock in the firm aspect tax shield investor firm dividend dividend <advanced conclusion> dividend stock 1. investor dividend stock individual tax rate > capital gain rate 2. dividend stock dividend stock stock dividend stock portfolio implication Transaction costs transaction cost ( ) transaction cost cost 8

9 transaction cost What do dividend changes tell us? dividend How to hurt the creditors? shareholders creditors shareholders creditors creditors creditors creditors creditors creditors stock bonds stock bonds creditor creditors creditors shareholders creditors 9

10 Dividend as a source of capital dividend dividend dividend dividend Dividend as a source of capital Do investors demand dividends? dividend?? Portfolio implications portfolio dividend policy dividend dividend dividend policy welldiversified portfolio portfolio 10

11 dividend portfolio low dividend diversification low dividend stocks portfolio implication dividend dividend dividend portfolio Conclusion: 1 The Miller-Modigliani Theorem M-M 2 Taxes investor firm dividend dividend 3 Transaction costs transaction cost 4 What do dividend change tell us 5 How to hurt the creditors 6 Dividends as a source of capital Dividend as a source of capital 7 Do investors demand dividends 8 Portfolio implications dividend portfolio puzzle Figure 18.8 Percent of CRSP Firms Paying Dividends 11

12 The Pros and Cons of Paying Dividend Pros: 1Cash dividends can underscore good results and provide support to stock price. 2. Dividends may attract institutional and individual investors may allow a firm to raise capital at lower cost because of the ability of the firm to reach a wider market. 3. Stock price usually increase with the announcement of a new or increased dividend. 4. Dividends absorb excess cash flow and may reduce agency costs that arise from conflicts between management and shareholders. Cons: 1. Dividends are taxed as ordinary income. 2. Dividends can reduce internal sources of financing. Dividends may force the firm to forgo positive NPV projects or to rely on costly external equity financing. 3. Once established, dividend cuts are hard to make without adversely affecting a firm s stock price. dividend paper model dividend Questions and Answers: 1 Q?? dividend?? A dividend dividend paper 2 Q paper?? A 12

13 paper (1) Miller-Modigliani Theorem M-M (2)Tax taxes dividend capital gains capital gains capital gains capital gains capital gains (3)Transaction costs transaction cost transaction cost automated system transaction costs 1. Miller-Modigliani Theorem 2. taxes 3. transaction cost 13

東吳大學 104 學年度碩士班研究生招生考試試題第 2 頁, 共 7 頁 5. Consider a project with the following cash flows. Year Cash Flow 0 -$16, , ,000 What s the IRR o

東吳大學 104 學年度碩士班研究生招生考試試題第 2 頁, 共 7 頁 5. Consider a project with the following cash flows. Year Cash Flow 0 -$16, , ,000 What s the IRR o 東吳大學 104 學年度碩士班研究生招生考試試題第 1 頁, 共 7 頁一選擇題 60 分 ( 單選每題 3 分 ) 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory 2. A 15-year,