8 ms·

There is no game theory here. The value of each person's decision is not affected by the decisions of others. It's important to remember that the company's sh

by dsjoerg 10y ago

There is no game theory here. The value of each person's decision is not affected by the decisions of others. It's important to remember that the company's shares are traded on a public market. The shares distributed by the company are valuable and can be sold for the same amount of money as the dividend you could have received. The key fact that the article ignores is that the shareholders collectively own the company. So if they all decline the dividend, they are effectively electing for the company they own to hold the cash (that they own by owning the company).

lanevorockz 10y ago
The shares are basically the a piece of the company. By issuing new shares it automatically depreciates the value of each share, so the company is worth the same but you own a smaller share of the company. You can end up in a grey area between two situations. 1. Everyone takes cash and you get the expected share price 2. Everyone takes shares and the value expected is halved
- ghshephard 10y ago
  Issuing dividends also depreciates the value of each share as well. (By exactly the total amount of the dividend / total number of shares.)
  - lanevorockz 10y ago
    I missed that, financials are the same so they should amount for essentially the same value. Still the dynamics of both are different and usually depreciation of the dividends is factored out on the price of the stock. I wonder if they are pricing the stock just before dividend and if that's fair.
ghshephard 10y ago
What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend date.
- spacecowboy_lon 10y ago
  And your point is? the ex div share price recovers in most cases.
  - icebraining 10y ago
    Recovers do the pre-dividend price or to what the price would be had there been no dividend?
  - ghshephard 10y ago
    It never recovers the value of the dividend. That is permanently gone.
  - ohyes 10y ago
    Eventually because of profits that go into the next dividend. Otherwise you would just buy each company pre div, sell it a little bit ex div, make tons of free money.
    - ghshephard 10y ago
      Or, alternatively, if there is no likelihood of future cash flow or profit, each issue of the dividend evaporates a bit more of the stock value, until either dividends are canceled, or the company delists.
- ucaetano 10y ago
  Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases). And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company. In other words, shareholders will be happier with the cash in their hands than in the company's bank account.
  - dpark 10y ago
deleted 10y ago
[deleted]
Hermel 10y ago
The Litmus test for that is to check whether the decision of an individual shareholder affects the others. I argue that this is the case. Assume that the shareholders have a preference for cash. If there is only one shareholder, he would clearly opt for the cash dividend, knowing that selling the equivalent amount of shares would adversely affect the market price. However, minority shareholders would probably opt for the shares, each thinking that he could sell the shares without affecting the market much, thereby ending up with 15% more cash in the end. And there is the negative externality: by opting for the shares and selling them, you push down the price a little for everyone, even though it only marginally affects you. So collectively, the shareholders will decide differently than if they were the only shareholder and might end up with less than if they would have chosen the cash dividend. Note that this argument only works when assuming that markets are not efficient, i.e. assuming that selling large quantities of shares affects their price.
- mathattack 10y ago
  Financial theory (a reliable but not foolproof way to look at this) would suggest that if a company you own shares in has too much cash, the owners would hold onto less cash elsewhere. This theory holds up in terms of maximizing returns, though not in a cash crunch.
mathattack 10y ago
Yes. This isn't a game theory paradox if the company is publicly traded. The one thing I would add is that taxes complicate the calculation if dividends are taxed differently than capital gains.
spacecowboy_lon 10y ago
Its just an artifact of the that countrys tax system if you can receive taxed income or scrip shares untaxed then 99.9% of people are going to go for scrip.
fennecfoxen 10y ago
> The key fact that the article ignores is that the shareholders collectively own the company. So if they all decline the dividend, they are effectively electing for the company they own to hold the cash (that they own by owning the company). The other thing that they can do is use the cash for stock buybacks. And it's all (theoretically) equivalent: the company and its cash pile are worth the same amount of money either way. Of course, questions arise in practice like tax treatment, and the fact that people who own businesses in practice don't want to own as much cash - that's what bank accounts are for, no need to glue them together - or whether companies systematically overpay for stock buybacks because they do it while the company feels prosperous as opposed to times when the stock is affordable.

by dsjoerg 10y ago

lanevorockz 10y ago

The shares are basically the a piece of the company. By issuing new shares it automatically depreciates the value of each share, so the company is worth the same but you own a smaller share of the company. You can end up in a grey area between two situations. 1. Everyone takes cash and you get the expected share price 2. Everyone takes shares and the value expected is halved

ghshephard 10y ago
Issuing dividends also depreciates the value of each share as well. (By exactly the total amount of the dividend / total number of shares.)
- lanevorockz 10y ago
  I missed that, financials are the same so they should amount for essentially the same value. Still the dynamics of both are different and usually depreciation of the dividends is factored out on the price of the stock. I wonder if they are pricing the stock just before dividend and if that's fair.

ghshephard 10y ago

What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend date.

spacecowboy_lon 10y ago
And your point is? the ex div share price recovers in most cases.
- icebraining 10y ago
  Recovers do the pre-dividend price or to what the price would be had there been no dividend?
- ghshephard 10y ago
  It never recovers the value of the dividend. That is permanently gone.
- ohyes 10y ago
  Eventually because of profits that go into the next dividend. Otherwise you would just buy each company pre div, sell it a little bit ex div, make tons of free money.
  - ghshephard 10y ago
    Or, alternatively, if there is no likelihood of future cash flow or profit, each issue of the dividend evaporates a bit more of the stock value, until either dividends are canceled, or the company delists.
ucaetano 10y ago
Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases). And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company. In other words, shareholders will be happier with the cash in their hands than in the company's bank account.
- dpark 10y ago

deleted 10y ago

[deleted]

Hermel 10y ago

The Litmus test for that is to check whether the decision of an individual shareholder affects the others. I argue that this is the case. Assume that the shareholders have a preference for cash. If there is only one shareholder, he would clearly opt for the cash dividend, knowing that selling the equivalent amount of shares would adversely affect the market price. However, minority shareholders would probably opt for the shares, each thinking that he could sell the shares without affecting the market much, thereby ending up with 15% more cash in the end. And there is the negative externality: by opting for the shares and selling them, you push down the price a little for everyone, even though it only marginally affects you. So collectively, the shareholders will decide differently than if they were the only shareholder and might end up with less than if they would have chosen the cash dividend. Note that this argument only works when assuming that markets are not efficient, i.e. assuming that selling large quantities of shares affects their price.

mathattack 10y ago
Financial theory (a reliable but not foolproof way to look at this) would suggest that if a company you own shares in has too much cash, the owners would hold onto less cash elsewhere. This theory holds up in terms of maximizing returns, though not in a cash crunch.

mathattack 10y ago

Yes. This isn't a game theory paradox if the company is publicly traded. The one thing I would add is that taxes complicate the calculation if dividends are taxed differently than capital gains.

spacecowboy_lon 10y ago

Its just an artifact of the that countrys tax system if you can receive taxed income or scrip shares untaxed then 99.9% of people are going to go for scrip.

fennecfoxen 10y ago

> The key fact that the article ignores is that the shareholders collectively own the company. So if they all decline the dividend, they are effectively electing for the company they own to hold the cash (that they own by owning the company). The other thing that they can do is use the cash for stock buybacks. And it's all (theoretically) equivalent: the company and its cash pile are worth the same amount of money either way. Of course, questions arise in practice like tax treatment, and the fact that people who own businesses in practice don't want to own as much cash - that's what bank accounts are for, no need to glue them together - or whether companies systematically overpay for stock buybacks because they do it while the company feels prosperous as opposed to times when the stock is affordable.