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:
“The at present unutterable things we may find somewhere uttered. These same questions that disturb and puzzle and confound us have in their turn occurred to all the wise men; not one has been omitted; and each has answered them, according to his ability, by his words and his life.”
—Henry David Thoreau (1817–1862)