“The harder we look at the dividend picture the more it seems like a puzzle, with pieces that just do not fit together” (Black 1976). Dividend policy is one of the most controversial topics and researched areas of corporate finance. But still the Dividend Puzzle: whether the dividend payout policy affects the value of the firm? what are the factors which affect the determination of the dividend policy?, seems unsolved. Many implausible reasons are given for why dividend policy might be important and many of the claims made about the dividend policy are economically illogical. Even so, in the real world of corporate finance, determining the most appropriate dividend policy is considered a most important issue. In fact, the dividend issue is quite challenging. The important elements are not difficult to identify but the interactions between those elements are complex and no easy answer exists.
(Ross 2009). Many dividend theories have been propounded to give the explanation on how the dividend decisions are being undertaken and whether it has an influence on the value of the firm. There are three different approaches in this regard.
On the right, there is a conservative group that believes an increase in dividend payout increases the value of the firm. On the left, there is a radical group that believes a higher dividend payout reduces the value of the firm