Dividend policy: A comprehensive analysis of classical, neoclassical, and modern theories in corporate finance

Younes Azekkar; Omar Boustta; Younes Taghouti; Brahim Abidar; Khalid El Ouafa

doi:10.31893/multirev.2025301

Keywords:

Abstract

This paper This paper provides an in-depth review of dividend policy theories, offering a nuanced understanding of the motivations behind dividend distributions and the factors influencing corporate payout decisions. It examines classical and modern frameworks, from the Dividend Irrelevance Theory, which posits that dividends do not affect firm value under perfect market conditions, to contemporary perspectives such as Agency Theory, which highlights dividends as a mechanism to reduce conflicts between managers and shareholders. The Signaling Theory suggests that dividend changes convey private information about a firm’s future prospects, while the Life Cycle Theory explains how payout policies evolve as firms mature. Behavioral Finance further explores psychological and behavioral factors influencing investor preferences. Beyond these theoretical perspectives, this study emphasizes the dynamic nature of dividend policy, shaped by financial constraints, managerial incentives, corporate governance structures, and investor expectations. Given the complexity of payout decisions, a multi-theoretical approach is essential to fully grasp their determinants. Furthermore, considering diverse market environments and regulatory frameworks, additional empirical research is needed to refine existing models and enhance their applicability across different corporate and institutional contexts.
References
1. Ali, H., & Hegazy, A. Y. (2022). Dividend policy, risk and the cross-section of stock returns: Evidence from India. International Economic Review, 79, 169–192. https://doi.org/10.1016/j.iref.2022.02.002
2. Al-Malkawi, H., Bhatti, M. I., & Magableh, S. I. (2014). On the dividend smoothing, signaling and the global financial crisis. Economic Modelling, 42, 159–165. https://doi.org/10.1016/j.econmod.2014.06.007
3. Azekkar, Y., El Mallouky, A., & El Ouafa, K. (2023). Dividend policy: A systematic literature review. International Journal of Accounting, Finance, Auditing, Management and Economics, 4(3-1), 757–772. https://doi.org/10.5281/zenodo.8092710
4. Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial Finance, 41(2), 126–144. https://doi.org/10.1108/MF-03-2014-0077
5. Baker, H. K., Powell, G. E., & Veit, E. T. (2002). Why companies use open-market repurchases: A managerial perspective. Quarterly Review of Economics and Finance, 43, 483–504. https://doi.org/10.1016/S1062-9769(02)00151-5
6. Barros, V., Matos, P. V., & Sarmento, J. M. (2020). What firm’s characteristics drive the dividend policy? A mixed-method study on the Euronext stock exchange. Journal of Business Research, 115, 365–377. https://doi.org/10.1016/j.jbusres.2019.11.042
7. Black, F. (1998). The dividend puzzle. Journal of Portfolio Management, 2(2), 5–8.
8. Charlier, P., & Du Bois, C. (2011). Gouvernance familiale et politique de distribution aux actionnaires. Finance Contrôle Stratégie, 14(1), 5–31.
9. DeAngelo, H., DeAngelo, L., & Stulz, R. (2006). Dividend policy and the earned/contributed capital mix: A test of the life-cycle theory. Journal of Financial Economics, 81(2), 227–254. https://doi.org/10.1016/j.jfineco.2005.07.005
10. Denis, D., & Osobov, I. (2008). Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial Economics, 89(1), 62–82. https://doi.org/10.1016/j.jfineco.2007.06.006
11. El Farissi, I., & M'rabet, R. (2011). Décisions financières de long terme. Paris: Economica.
12. Fama, E., & French, K. (2001). Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3–43. https://doi.org/10.1016/S0304-405X(01)00038-1
13. Franc-Dąbrowska, J., & Mądra-Sawicka, M. (2020). Determinants of dividend payout decisions–the case of publicly quoted food industry enterprises operating in emerging markets. Research in Economics, 33(1), 1108–1129. https://doi.org/10.1080/1331677X.2019.1631201
14. Gordon, M. J. (1959). Dividends, earnings, and stock prices. Review of Economics and Statistics, 41(2), 99–105. https://doi.org/10.2307/1927792
15. Goyal, S. (2019). The dividend puzzle misspecification–Why the role of dividends is not what people think. Cogent Economics & Finance, 7(1). https://doi.org/10.1080/23322039.2019.1649000
16. Grennan, J. (2019). Dividend payments as a response to peer influence. Journal of Financial Economics, 131(3), 549–570. https://doi.org/10.1016/j.jfineco.2018.01.012
17. Grullon, G., Michaely, R., & Swaminathan, B. (2002). Are dividend changes a sign of firm maturity? The Journal of Business, 75(3), 387–424. https://doi.org/10.1086/339889
18. Hess, P. (1980). Dividend yields and stock returns: A test for tax effects [Unpublished doctoral dissertation]. University of Chicago.
19. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
20. Kalay, A. (1982). The ex-dividend day behavior of stock prices: A re-examination of the clientele effect. The Journal of Finance, 10(2), 211–233. https://doi.org/10.1111/j.1540-6261.1982.tb03598.x
21. Lee, B. S., & Mauck, N. (2016). Dividend initiations, increases and idiosyncratic volatility. Journal of Corporate Finance, 40, 47–60. https://doi.org/10.1016/j.jcorpfin.2016.07.005
22. Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review, 46(2), 97–113. https://doi.org/10.2307/1910664
23. Litzenberger, H., & Ramaswamy, K. (1979). The effect of personal taxes and dividends on capital asset prices: Theory and empirical evidence. Journal of Financial Economics, 7(2), 163–195. https://doi.org/10.1016/0304-405X(79)90012-6
24. Michaely, R., & Moin, A. (2022). Disappearing and reappearing dividends. Journal of Financial Economics, 143(1), 207–226. https://doi.org/10.1016/j.jfineco.2021.06.029
25. Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. Journal of Business Research, 4(4), 411–433.
26. Oubahou, U., & El Ouafa, K. (2024). Contribution to the study of the impact of IFRS on the quality of information and financial markets: Which theories are used? International Journal of Religion, 5(11), 8212–8220. https://doi.org/10.61707/njrce624
27. Pettit, R. (1972). Dividend announcements, security performance, and capital market efficiency. The Journal of Finance, 27(4), 993–1007. https://doi.org/10.1111/j.1540-6261.1972.tb03018.x
28. Riad, L., & Touili, K. (2017). Dividendes en présence des imperfections du marché. European Scientific Journal, 13(25), 163–176.
29. Thaler, R., & Shefrin, H. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392–406. https://doi.org/10.1086/260971
30. Thanatawee, Y. (2011). Life-cycle theory and free cash flow hypothesis: Evidence from dividend policy in Thailand. International Journal of Financial Research, 2(2), 52–60. https://doi.org/10.5430/ijfr.v2n2p52
31. Verdickt, G., Annaert, J., & Deloof, M. (2019). Dividend growth and return predictability: A long-run re-examination of conventional wisdom. Journal of Empirical Finance, 52, 112–127. https://doi.org/10.1016/j.jempfin.2019.03.002

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How to cite

Azekkar, Y., Boustta, O., Taghouti, Y., Abidar, B., & Ouafa, K. E. (2025). Dividend policy: A comprehensive analysis of classical, neoclassical, and modern theories in corporate finance. Multidisciplinary Reviews, 8(9), 2025301. https://doi.org/10.31893/multirev.2025301

[1] Ali, H., & Hegazy, A. Y. (2022). Dividend policy, risk and the cross-section of stock returns: Evidence from India. International Economic Review, 79, 169–192. https://doi.org/10.1016/j.iref.2022.02.002

[2] Al-Malkawi, H., Bhatti, M. I., & Magableh, S. I. (2014). On the dividend smoothing, signaling and the global financial crisis. Economic Modelling, 42, 159–165. https://doi.org/10.1016/j.econmod.2014.06.007

[3] Azekkar, Y., El Mallouky, A., & El Ouafa, K. (2023). Dividend policy: A systematic literature review. International Journal of Accounting, Finance, Auditing, Management and Economics, 4(3-1), 757–772. https://doi.org/10.5281/zenodo.8092710

[4] Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial Finance, 41(2), 126–144. https://doi.org/10.1108/MF-03-2014-0077

[5] Baker, H. K., Powell, G. E., & Veit, E. T. (2002). Why companies use open-market repurchases: A managerial perspective. Quarterly Review of Economics and Finance, 43, 483–504. https://doi.org/10.1016/S1062-9769(02)00151-5

[6] Barros, V., Matos, P. V., & Sarmento, J. M. (2020). What firm’s characteristics drive the dividend policy? A mixed-method study on the Euronext stock exchange. Journal of Business Research, 115, 365–377. https://doi.org/10.1016/j.jbusres.2019.11.042

[7] Black, F. (1998). The dividend puzzle. Journal of Portfolio Management, 2(2), 5–8.

[8] Charlier, P., & Du Bois, C. (2011). Gouvernance familiale et politique de distribution aux actionnaires. Finance Contrôle Stratégie, 14(1), 5–31.

[9] DeAngelo, H., DeAngelo, L., & Stulz, R. (2006). Dividend policy and the earned/contributed capital mix: A test of the life-cycle theory. Journal of Financial Economics, 81(2), 227–254. https://doi.org/10.1016/j.jfineco.2005.07.005

[10] Denis, D., & Osobov, I. (2008). Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial Economics, 89(1), 62–82. https://doi.org/10.1016/j.jfineco.2007.06.006

[11] El Farissi, I., & M'rabet, R. (2011). Décisions financières de long terme. Paris: Economica.

[12] Fama, E., & French, K. (2001). Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3–43. https://doi.org/10.1016/S0304-405X(01)00038-1

[13] Franc-Dąbrowska, J., & Mądra-Sawicka, M. (2020). Determinants of dividend payout decisions–the case of publicly quoted food industry enterprises operating in emerging markets. Research in Economics, 33(1), 1108–1129. https://doi.org/10.1080/1331677X.2019.1631201

[14] Gordon, M. J. (1959). Dividends, earnings, and stock prices. Review of Economics and Statistics, 41(2), 99–105. https://doi.org/10.2307/1927792

[15] Goyal, S. (2019). The dividend puzzle misspecification–Why the role of dividends is not what people think. Cogent Economics & Finance, 7(1). https://doi.org/10.1080/23322039.2019.1649000

[16] Grennan, J. (2019). Dividend payments as a response to peer influence. Journal of Financial Economics, 131(3), 549–570. https://doi.org/10.1016/j.jfineco.2018.01.012

[17] Grullon, G., Michaely, R., & Swaminathan, B. (2002). Are dividend changes a sign of firm maturity? The Journal of Business, 75(3), 387–424. https://doi.org/10.1086/339889

[18] Hess, P. (1980). Dividend yields and stock returns: A test for tax effects [Unpublished doctoral dissertation]. University of Chicago.

[19] Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

[20] Kalay, A. (1982). The ex-dividend day behavior of stock prices: A re-examination of the clientele effect. The Journal of Finance, 10(2), 211–233. https://doi.org/10.1111/j.1540-6261.1982.tb03598.x

[21] Lee, B. S., & Mauck, N. (2016). Dividend initiations, increases and idiosyncratic volatility. Journal of Corporate Finance, 40, 47–60. https://doi.org/10.1016/j.jcorpfin.2016.07.005

[22] Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review, 46(2), 97–113. https://doi.org/10.2307/1910664

[23] Litzenberger, H., & Ramaswamy, K. (1979). The effect of personal taxes and dividends on capital asset prices: Theory and empirical evidence. Journal of Financial Economics, 7(2), 163–195. https://doi.org/10.1016/0304-405X(79)90012-6

[24] Michaely, R., & Moin, A. (2022). Disappearing and reappearing dividends. Journal of Financial Economics, 143(1), 207–226. https://doi.org/10.1016/j.jfineco.2021.06.029

[25] Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. Journal of Business Research, 4(4), 411–433.

[26] Oubahou, U., & El Ouafa, K. (2024). Contribution to the study of the impact of IFRS on the quality of information and financial markets: Which theories are used? International Journal of Religion, 5(11), 8212–8220. https://doi.org/10.61707/njrce624

[27] Pettit, R. (1972). Dividend announcements, security performance, and capital market efficiency. The Journal of Finance, 27(4), 993–1007. https://doi.org/10.1111/j.1540-6261.1972.tb03018.x

[28] Riad, L., & Touili, K. (2017). Dividendes en présence des imperfections du marché. European Scientific Journal, 13(25), 163–176.

[29] Thaler, R., & Shefrin, H. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392–406. https://doi.org/10.1086/260971

[30] Thanatawee, Y. (2011). Life-cycle theory and free cash flow hypothesis: Evidence from dividend policy in Thailand. International Journal of Financial Research, 2(2), 52–60. https://doi.org/10.5430/ijfr.v2n2p52

[31] Verdickt, G., Annaert, J., & Deloof, M. (2019). Dividend growth and return predictability: A long-run re-examination of conventional wisdom. Journal of Empirical Finance, 52, 112–127. https://doi.org/10.1016/j.jempfin.2019.03.002

Abstract

References

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