Dividend - Relevant or Irrelevant?

Modigliani & Millar (1961) argued that share price could not be determined by dividend payment, it is actually determined by the future earning potential of the firm. However, authors like Linter (1956) and Gordon (1959) believe in the relevance of dividend. Both concept have an understandable rationales. It has to be noted though, M&M don't absolutely reject the payment of dividends but expresses it irrelevance to shareholder wealth. From an investor's point of view, the payment of dividends can mean a lot, some investors require the regular income from dividends for cash flow purposes therefore a lack of dividend payment automatically cuts out a huge amount of potential investors. Linter and Gordon tend to follow the "Bird in Hand Argument" basically meaning investors prefer dividends because of the security it offers as it provides some level of certainty to investors. Generally, the argument proposed by M&M that in place of dividends investors can sell their shares however, the duo neglected the fact that investors will lose part ownership of the firm by selling shares. This reason alone is enough to boost the relevance of dividend payments.

Also, the use of dividend payments to predict the performance of a company is common among investors therefore, not paying dividends could come across as bad news being emitted from the company. However, Pettit (1972) and Ahonery & Swary (1980) confirm that in reailty the reverse might be true. They believe in reality high dividends may indicate a lack of attractive investment thereby lower future investment returns and low dividends may indicate lots of attractive investment and ascertain future investment returns. This situations are valid however in times of economic downturns such as recorded in the US by Justin Baer in his article "US investors start year with paucity of pay-outs". Majority of companies in the US have cut dividend payments and some have even gone up to cancel it, their main reason being the economic downturn witnessed  in 2007. Analyst predict a tough time ahead for investors due to the effect of the economic downturn as companies all over the world are reviewing their dividend policy. The question in a situation of this nature is, can dividends be used to determine shareholder value? is it that relevant? Companies like Dow Chemical who has paid dividend for over 389 quarters have cut dividend payments, is this a diminish of shareholder wealth? if it is does it then mean dividends are relevant otherwise vice versa? 

Commerzbank - Capital Structure

Commerzbank this week announced its efforts and methods to raise huge amounts of  finance. As evidently expressed by Neil Hume in his article "Commerzbank's mind-numbing cash call", the organisation is taking very complicated actions towards this cash call. It carries on to express how the whole capital structure of the organisation will change as a result of this particular cash call. The cash call is a mixture of debt and equity, debt being "silent participations" from the German government and equity from a number of sources such as conditional equity, rights issues e.t.c.

This kind of cash call and capital structure re-arrangement could move Commerzbank closer to an" optimal capital structure" seen as this is the most favourable point for any business regardless of Mondiglian & Millar's concept of the in-existence of an optimal capital structure. It only makes sense for an optimal capital structure as it is impossible for the increase of debt no to record any favourable improvements in a firms activities. It is widely believed that, increases in debt will only be favourable until a creating point when it starts affecting share prices and dividend payment. In this scenario with Commerzbank, the business seem to have raised finance mainly from    investors. This is good in that, it's opened to less risk from interest payments, however, earning will have to split between a lot more investors thereby reducing earnings per share, which will diminish shareholder value.

The struggle to attain optimal capital structure can be difficult however, achieving it is great as means a firms is fully exhausting its capital options to its maximum abilities with operations still at its best.