The Dividend Irrelevance Theorem and Competing Dividend Theories

Why do firms pay dividends? Why do investors like dividend payments? After 50 years of research, there is still no comprehensive answer to these questions. It is not that scholars are apathetic in resolving these issues. Instead, there has been a plethora of promising theoretical explanations, but the empirical evidence does not yield a clear picture, so that dividends still remain an enigma. The rocky road to finding an adequate answer is reflected in Fischer Black’s comment: “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together.” Even after 20 years of comprehensive research, Allen, Bernardo and Welch (2000) conclude that “dividends remain one of the thorniest puzzles in corporate finance.”