Does it matter whether or not firms pay dividends Why Essay

Does it matter whether or not firms pay dividends Why - Essay Example Those companies use that undistributed earnings to reinvest in the business and thereby increase the size of the organisation. Evidently, this practice may adversely affect the financial interests of company shareholders. However, the current market position of the firm particularly influences the implications of non-payment of dividends on the business. This paper will specifically discuss what happens whether or not firms pay dividends. Why some companies pay dividends while some others do not? Undoubtedly, a company tends to pass its earnings to shareholders as remuneration for their investments and hence to retain their interests in the company. When an organisation pays attractive dividends, existing shareholders can significantly gain from their investments. It forces shareholders to stay with the company, and the payment of dividends may also assist the company to attract new potential stakeholders (‘Investor Relations’ 2010). It is clear that dividends paid for a fiscal period is appeared on the consolidated balance sheet prepared at the end of that period. Investors mainly scrutinise current dividend rates so as to decide whether or not to purchase the stocks of the firm. Usually, if investors find that the company offers poor dividend rates, they would not be much interested in investing in that firm. It must be noted that the price of a share is greatly affected by the demand for that particular share in the stock market. Thus, poor dividend rates and non-payment of dividends may cause the firm’s stock prices to decline. Evidently, no company would be willing to accept a decline in its share prices. Therefore, today many of the companies strive to meet its investors’ interests and to attract new potential investors by paying attractable dividends to stockholders. In contrast, rapidly growing concerns would keep maximum money with them so as to promote further growth. Hence, those concerns would not pay dividends. Even a mat ure organisation which believes that it has further growth potential may choose to reinvest its earnings into the business. Companies that do not pay dividends may use the saved money to invest in a new project, acquire new assets, repurchase their shares that have been sold to outsiders, or even to buy out a running company. Many firms avoid paying dividends to eliminate the huge expenses of issuing new stocks. By keeping their full earnings with them, companies can get rid of the risk of raising funds to meet their various needs. Does it matter whether or not firms pay dividends? The implications of payment or non-payment of dividends on the business may vary according to the investors’ actual investment interests. If the business is still rapidly growing and the investor has long term interests in the company, then non-payment of dividends would not matter. More precisely, when an investor aims at high rates of returns on his investment in the long term, he would be willin g to sacrifice his short term financial interests for the long term growth of the firm. As discussed already, the reinvestment of earnings in the business would greatly assist a growing organisation to fuel its business growth. Therefore, a financially sound investor would support reinvestment of profits for the further growth of the business. From a tax perspective, non-payment of dividends can better serve the financial interes