Bird-in-hand theory, Finance Basics

Bird-in-hand Theory

Advanced via John Leitner in year 1962 and furthered with Myron Gordon in year 1963. Argues such shareholders are risk averse and prefer specific. Dividends payments are more specific than capital gains that rely on supply and demand forces to determine share prices.

Hence, one bird in hand as certain dividends is better than two birds in the bush as uncertain capital gains. Consequently, a firm paying high dividends or certainly will have higher value as shareholders will require using lower discounting rate.MM argued against the above proposition. They argued such the required rate of return is independent of dividend policy. They kept such an investor can realize capital gains created by reinvestment of retained earnings, where they sell shares. If this is probably possible, investors would be indifferent between capital gains and cash dividends.

Posted Date: 1/31/2013 2:33:22 AM | Location : United States

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