Corporate dividend policy has captured the interest of financial economists for almost 100 years and has been the subject of intensive theoretical modeling and empirical examination by financial economists for the last 40. A number of conflicting theoretical models, none with conclusive empirical support, define the current state of attempts to explain the dividend phenomenon.

Common stock theory proponents maintain that the safety and total return from dividends and capital gains of common stock will exceed bond return over the long term. Common stocks are able to sustain purchasing power more effectively than bonds because as commodity prices increase, purchasing power decreases and the bond income and par value returned upon maturity become less valuable (Fisher, 1912). The theory requires only fundamental assumptions: limited investor liability, complete markets, and the ability of investors to diversify their portfolios. A number of elementary empirical studies support this theory. ^[1]

Initial forays into explaining corporate dividend policy are divided as to their prediction of the dividend payment s effect on share prices. Three ways of thinking seem to be offered: one way is explaining dividends as attractive and a positive influence on stock price, a second way of thought argues that stock prices are negatively correlated with dividend payout levels, and a third avenue of empiricists maintains that the firm s dividend policy is irrelevant in stock price valuation.

Preinreich (1932) was the first to suggest that dividend policy is merely a residual decision. Dividends are paid to shareholders if and only if revenues remain...