Corporate Finance Essay Example | Topics and Well Written Essays - 3500 words

Corporate Finance - Essay Example e impact on stock prices.(Frankfurter 2002 )Another school of thought contends that prices are negatively correlated with dividend payout levels.(Frankfurter 2002).The third view is that firm dividend policy is irrelevant in stock price valuation. (Frankfurter 2002.These views are best summed up as being based upon, the tax effect ( Litzenberger and Ramaswamy (1980),)Clientele effects explanations (Elton and Gruber, 1970), Agency theory explanations(Easterbrook 1984), Signaling models(John and Williams (1985), and psychological/sociological explanations ( Frankfurter and Lane 1992). Coming to the aspect of Dividend Policies, Capital structure decisions and taxation academic literature has similarly differed and presented varying views. The leading theory here is the MM theory discussed below based on which the paper explores the literature pertaining to the simultaneous effect of both the corporation tax and personal income taxes on the dividend policy and capital structure of a firm in theory. In this vein many other studies have also examined the temporal pattern of corporate dividend payout and dynamic dividend behavior based on varying tax codes.(MA Lasfer 1996). It has been seen often that there will be â€Å" structural shifts in the aggregate dividend payout and these shifts often coincide with tax law changes†(Wu 1996).Thus the empirical evidence on the effects of both corporation and personal income taxes on dividend payment adjustments and on capital structure decisions is accordingly reviewed hereafter. It has often been stated that companies set their dividend policies to minimize their tax liability and to maximize the after-tax return of their shareholders. (Wu 1996).It has also been stated that whenever a company is unable to deduct the advanced corporate tax from their tax liability it will resort to giving out low dividends.(Wu 1996 citing Brennan). The notion of the tax hypothesis states that the differential taxation of dividends and