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This is a topic which is debatable.One school of thought is that dividend payouts have a signalling effect to the market and that paying out a dividend as opposed to reinvesting money back in company will signal to investors confidence of management and creditors in company’s future stability and growth as it won’t require dividend for internal financing of growth or debt and management and creditors are likely to have more information about prospects for company than average shareholder.The counter argument is that dividends have no impact on share price as return to shareholders will come from capital growth of share price if not from dividends.In other words whether a company pays out dividend or not the money essentially “belongs” to shareholders anyway and they are indifferent as to how this return is realised-whether from capital growth or dividend payout.
There is a lot more information about this topic and surrounding theories such as the efficiency of capital markets which I would suggest you look at again in your revision.There is also an argument presented that for tax reasons some shareholders prefer a capital based return on their shareholding in preference to dividend based return and therefore seek out companies with low or no dividend payouts.Again I would look back at your revision materials and consider asking in the ask the tutor forum if you have any more problems.
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