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what are the motivations for companies to keep paying dividends? The value of the shares will be maintained which helps with aquisitions and also puts money in the pocket of any members of management who own stock.Any other reasons?

The company may not like any of their other choices for spending their profits at that particular time. Some of these other choices might be capital investments (for example building a new factory) or spending on research and development.

as long as the management does not own 100% of the firm, there might be free cash flow problem (cf. Jensen 86).

what do you mean?

Paying dividends makes the stock price go down, not up. That makes acquisitions harder, it's more likely the company would have to raise outside capital or get the target shareholders to accept stock. It might put money in the pockets of management, but they could get that money by selling shares. That's more tax-efficient, since only the ones who want money pay taxes, and only on the profit rather than the entire amount, and only on as much money as they want. It hurts the value of management's options.Financially, there's no obvious reason for dividends. Cash that cannot be reinvested at the required return on equity can be used to buy back shares.There are a number of proposed reasons for paying dividends, the most plausible is that it's a signal to the market.

(double)

QuoteOriginally posted by: ppauperdepending on the jurisdiction and the comparative taxation rates of dividends and cap gains, there may be a taxation advantage/disadvantage to dividends Miller & Modigliani have argued that dividends are irrelevantsee damodaranthere's also signalling theory which argues that dividends are a signal of future earnings expectationsdamodaran's overheadsfirms with large piles of money are juicy takeover targets so paying dividends reduces that risk

1 - Huge dividend yields are used by management executives to protect their job (from takeovers) at the expense of shareholders...2 - Sadly, where I'm from, dividends of public held companies are also used to fund the government budget deficit!

Aaron, can you please elaborate a bit more on the tax difference between retained earnings and equity financing ? I'm a little lost here. Thanks~