Dividend irrelevancy theory

In a perfect capital market (no tax, no transaction costs and no imperfections) shareholders will want to increase wealth but wont care if thats through divdend or increased share price.

Residual theory

Argues dividends themselves are important but the pattern of them is not. Dividends should be paid after all positive NPV projects have been undertook.

Dividend relevance

Changes in dividend (especially a reduction) can have an adverse affect on shareholder wealth.

Upset investor tax planning

Conflict with investor liquidity requirements

Reduction can convey bad news to investors

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