Finance Literature review Example | Topics and Well Written Essays - 750 words

Finance - Literature review Example he larger it grows, the management therefore has an important decision to make on whether to pay the shareholders their dividends presently or hold onto the money and make a payment of an increased amount. Besides the two, a firm may opt to pay its shareholders in terms of stock dividends; this unlike cash does not offer liquidity but ensures capital gains by the investors. These and many other issues related to the payment of dividends make dividend policies of significant relevance to the management of the firm. For example, the expectation of the dividends by the shareholders, aid determines the value of the firm’s shares. Firms can choose from a number of dividend policy forms and theories to use in the management of their dividends. However, the choice depends on a number of factors key among which is the capital size of the firm (Stickney, 2010). Smaller companies may not have the financial advantage to pay hefty dividends to its shareholders yet still stay operational; they therefore require those policies that consider its market share and the overall level of the return on investment. Additionally, the market factors all of which in a way affect the business operations of the firm must also have adequate consideration before the payment of dividends. This explains the every fluctuating amount paid to shareholders after every financial p eriod. In a summary, dividend arises from the profits made in every financial period. After operating, the firm determines its profit, which is often after deducting the cost of conducting business and that of maintaining the business (Dyck & Neubert, 2010). The firm therefore divides the resulting amount to the shareholders based on the amount of shares each possesses. However, the investors do not share the losses of the company. It is therefore obvious that every operational factor in the market that affects the profitability of the firm directly affects the resultant dividend value and subsequently the share value.