Paying
dividends would attract more investors and satisfy stockholders including a
manager who owns a big share of corporate stocks. Therefore management can find
a way to pay extensive dividends to enjoy some personal profit. This is one
reason why there are legal restrictions in place to make sure dividend paying
would not go out of hand.
The
amount of dividends a firm may pay can be limited by certain legal
restrictions. These restrictions vary from state to state. There are two
categories that these constraints fall into: statutory restrictions and owners/creditors
provisions.
Statutory
restrictions may constrain a company from paying dividends, (1) if the firm’s
liabilities are greater than its assets, (2) if the dividend amount exceeds
retain earning, and (3) If the dividend is being paid from capital invested in
the firm.
Another
form of legal restriction is resulted from owners/creditors provisions. These
are the restrictions that are unique to each firm. Common stockholders are the
legal owners of a corporation and they frequently inflict restrictive
provisions on managers to minimize risk. For example they may refuse dividend’s
deceleration before the debt is repaid or in order to raise capital gain. Preferred
stockholders do not own the corporation and cannot make executive decisions but as
creditors they have priority over common stock holders which enable them to
refuse common dividends when preferred dividends are dis-satisfactory.
As
we can see corporate managers are not the only ones who make decisions regarding
dividends. Federal and state government, common stock holders, preferred stock
holders, and other creditors such as bond holders can supervise the amount of
dividends a firm may pay.
Resource
Resource: Keown Arthur, Martin John, Petty
William. Foundations of Finance prentice Hall, Pearson .Upper Saddle River, New
Jersey: 7th Edition
No comments:
Post a Comment