Plausible
1) Investors preference for dividends
If taxes & transactions costs are ignored, dividends and capital receipts should be perfect substitute.
2) Self control and dividend
Individual often lacks self control so rely on rules & programmes which check their temptations.
3) Aversion to regret & dividend.
These suggest that many people sell stock before time as the prices goes up than before and then they feel regret of selling shares at lower price.
4) Information signaling.
Management often has significant information about the prospect of the firm that it cannot disclose to investor. The information gap between management and shareholders generally causes stock prices to be less than what they would be under condition of information symmetry.
5) Clientele effect.
Investors have diverse preferences some want more dividend income other want more dividend capital, still other want a balanced mix of dividend income and capital gains.
6) Agency cost.
If the shareholders have complete faith in the integrity and rationality of management there is no reason why the company that has profitable investment opportunities should pay and dividend.
Dubious
1) Bird in hand fallacy
It mainly talks about the high dividend policy is beneficial to shareholders because it reduce uncertainty. As long as capital spending and borrowing remain unchanged, the dividend policy cannot change the firm’s overall cash flows and its risk, which truly determine the firm’s value.
2) Temporary excess cash
If the firm has excess cash then the firm should not ignore long term investment needs if the excess cash is non-recurring factors like windfall gain or sale of firm is likely to have shortfall in future needs.
