Why Do Companies Adopt Different Payout Policies?

BS320 Corporate Finance

Why do companies adopt different payout policies?

It is my intention that this paper will give a clear and comprehensible explanation to why it is necessary for “different companies to adopt different payout policies”. The explanation will address all the elements and options that a firm must assess and consider, when trying to determine the amount and form of a payout.

Introduction

In order to answer the question ‘Why do companies adopt different payout policies?’ it is necessary to understand that there is a number of considerations for company to take into account when choosing a policy. A firm will try to choose a payout policy of a semi-permanent nature or at least one that will hopefully last for the foreseeable future. That is why, when a firm chooses a policy not only will it be attributed to its current situation, but the direction it wishes to head in the future. However, the direction the firm wishes to take is not always the best option for management to take when choosing a ‘payout policy’, they must also try to entice perspective investors and or keep current ones.

Firstly, it should be made clear as to what the terms “payout” and “policy” actually entail. According to investopedia.com (2009) a ‘payout’ is the “expected return from an investment over a given period of time”, it continues to say that it is the amount given to an investor in the form of a dividend or share dividend. From that explanation we learn that a payout is a dividend.

A dividend according to investorwords.com (2009) is a taxable payment that a company gives to an investor, a payment that can be in cash, shares or other property, but must be made from profits or the retained earnings of a company.

A dividend payout policy is the policy that a firm uses to decide what happens with the profits earned by the firm. The firm uses the policy to decide how much it will give to the equity holders of the firm and how much it will keep for itself...