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The Corporate Dividend-Saving Decision

The purpose of this paper is to derive and test a model of the dividend-saving decision for a shareholder wealth-maximizing firm. Starting with the basic proposition that shareholders should prefer capital gains income to dividend income in a world of differential taxes and transactions costs, dividends are viewed as basically a residual in the corporate decision process. The term residual does not imply that there is no dividend decision or that dividend policy does not affect the worth of the firm since, as argued, the selection of an optimal level of dividends in an uncertain environment still involves the forecasting of future investment needs and the selection of a dividend-saving program to finance these needs at minimum cost. The relevant costs in this context relate to the possible accumulation of excess liquidity resulting from insufficient dividends on the one hand and the possible need for external equity financing resulting from excessive dividends on the other.