Dividends and society-part II: "The rationality of dividends"

Official URL: https://dx.doi.org/10.4324/9781315188911

Observed dividend behavior is not well explained by models based on the pure economic rationale of value maximization. Why are economists, after 30 years of extensive model building, still unable to solve the “dividend puzzle”? In this paper it is argued that dividend disbursements are better seen as a ritual, dating back to the evolution of the modern corporation. To further the comprehension of the behavioral underpinnings of corporate dividend policy, researchers must be willing to accept the notion of bounded rationality as it pertains to the dividend decision phenomenon. By example a parallel between the customs of payment of dividends and the Potlatch is drawn. While both are long enduring institutions, neither is explainable solely by a pure economic maxim. An alternative avenue of reconciling dividend policy with observable behavior is suggested.