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M&M said dividend policy is not important because:

(dividend irrelevance theory)

  1. There is no tax: when receiving a dividend you don’t need to pay income tax and when you sell a share you don’t need to pay capital gains tax.
  2. There is no transaction cost: this means shareholders can sell a share freely incurring no costs.
  3. Perfect market: this means if company cuts dividend for the year then shareholders know exactly why they are doing this, ie, retain profit and invest in profitable projects to generate a higher return.
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But the actual world suggests this matters because:

(Traditional theory)

  1. There is tax: when receiving a dividend you need to pay income tax and when you sell a share you need to pay capital gains tax.
  2. There is transaction cost: this means when shareholders sell a share then it incurring costs.
  3. Imperfect market: this means if company cuts dividend for the year then shareholders don’t know exactly why they are doing this and this would make shareholders not happy.

Signaling effect: if company cuts dividend and it suggests company is having cash flow problems.
 
Clientele effect: some shareholders would prefer dividend and hence they buy the shares.
 

There would be other ways besides giving shareholder dividend:

  1. Give them something: for Free, like free flights/free shares.
  2. Given them cash: by repurchasing shares from the market.