The dividend puzzle is a concept in finance in which companies that pay dividends are rewarded by investors with higher valuations, even though, according to many economists, it should not matter to investors whether a firm pays dividends or not. The reasoning goes that dividends, from the investor’s point of view, should have no effect on the process of valuing equity because the investor already owns the firm and, thus, he/she should be indifferent to either getting the dividends or having them re-invested in the firm.
The puzzle evolved from the Modigliani-Miller theorems of 1959 and 1961.
The reasons for the dividend puzzle have been attributed to a wide range of factors, including, among others, uncertainties, psychological/behavioral economics issues, tax-related matters and asymmetric information.
Famous quotes containing the word puzzle:
“Scholars and artists thrown together are often annoyed at the puzzle of where they differ. Both work from knowledge; but I suspect they differ most importantly in the way their knowledge is come by. Scholars get theirs with conscientious thoroughness along projected lines of logic; poets theirs cavalierly and as it happens in and out of books. They stick to nothing deliberately, but let what will stick to them like burrs where they walk in the fields.”
—Robert Frost (1874–1963)