The Effect On The Shareholder's Interest Of The Cash Dividend Policy

Dividend policy is an important part of corporate financial management, and it also is a very difficult problem. Comparing to cash dividend policy of high payout ratio in the west countries, many companies in China do not like issuing the cash dividend. Many studies just pointed out that the investor should be responsible for that because of their irrational behavior. However, no further study was done for this question. In this paper, the problem was discussed again. Based on the shareholder's interest, the theoretical and the empirical analysis are used to discuss the cash dividend problem.The shareholder's interest can be reflected mostly by the equity value; therefore, the effect on the shareholder's interest of the cash dividend can be studied based on the equity value model. However, the traditional disperse equity valuation model can not directly express what is the best cash dividend policy for the shareholders. The continuous-time equity valuation model can solve this problem. By analyzing that model, we find that when the company has positive change tendency of abnormal earnings, dividend payout does harm to shareholder interest, while when the company has negative change tendency of the abnormal earnings, dividend payout is beneficial to the shareholder. And the further study shows that if the company can get enough the external financing and keep the normal profitability, the payout of the dividend can't affect the shareholder's interest when the change tendency of the abnormal earnings is positive.The empirical result supports the above conclusion. When the profitability level is controlled, we find that the company with positive change tendency of the abnormal earnings trends to reduce the dividend payout, while the company with negative change tendency of the abnormal earnings tends to increase the dividend payout. We also find that, when the company have negative change tendency of the abnormal earnings, the reducing of the dividend will harm the shareholder's interest, while when the company has positive change tendency of abnormal earnings, the dividend payout will not affect the shareholder's interest The further tests find the external financing is the main reason.According to research results, it is suggested that the company should make their dividend policy according to their change tendency of the abnormal earnings. And according to the conclusion from this paper that the reducing the issue of the dividend is not beneficial to the shareholders, it is suggested that more policies should be made to require the company to issue more dividends so as to assure the shareholders interest.