Dividends versus capital gains : an empirical study of shareholders of Maltese listed companies

Abstract

The purpose of this study is to contribute to the solution of the dividend puzzle, by understanding shareholders' dividend behaviour. By means of a questionnaire, the study attempts to gain insight into the behaviours and perceptions of 162 shareholders of companies listed on the Malta Stock Exchange. The respondents tend to support all dividend theories that have been proposed in the dividend puzzle since the early 1950s. They indicate that they want dividends partly because the transaction costs of cashing in dividends is lower than those of realising capital gains. Shareholders also provide strong confirmation for the self-control, the life-cycle, the agency costs and the bird-in-the-hand theories of dividends. Respondents also tend to perceive dividends as indicators of real earnings, and as efficient signallers of corporate information. Furthermore, shareholders want to receive dividends because dividends reduce the overinvestment problem of companies as well as have a positive effect on the share's market price. Moreover, the study also finds evidence that shareholders with high investment risk tolerance prefer capital gains to dividends, and this is consistent with Lintner's (1956) bird-in-the-hand theory. The findings also indicate that 64 percent of the respondents have a preference for shares that pay dividends, despite of their tax disadvantage. However, shareholders who prefer dividend-paying shares have shown reluctance to receive dividends if this requires the company to borrow new funds or issue new shares. In addition, it was found that shareholders who have a preference for shares that yield capital gains have expressed their interest to receive dividends.