Do Existing Market Forces Ensure Optimal Dividend Policy?
Fischel says that if dividend policy is important, managers who make suboptimal dividend decisions will reduce the value of their services in the managerial labour market, the company’s value on the share market and its position in the product market. [79] There are clearly some market incentives for managers to make the right dividend decision. However, this conclusion is not fatal to the argument for mandatory disclosure. Without disclosure of the rationale behind the dividend decision, markets may not punish managers because market participants will not have the necessary information to know whether optimal dividend decisions have been made. Therefore, shareholders and markets need clarification of the reasons lying behind the dividend decision, and not simply an assurance from management that they have set the optimal dividend policy. Additionally, the benefits for managers which arise from the conflicts mentioned in Section 4 may outweigh the penalties imposed by markets for not a
