Reasons
of Dividend Retention
Reasons
of Dividend retention as compared to new issue of shares may be explained in
terms of no issue cost, no formalities for issue, and a trend of dividend and
management effort.
1. No issue Cost
First
reason for dividend retention or using internal financing is almost no cost of
issue. It is important to remember that arranging more capital from market
involves a lot of issue cost. This cost includes advertisement cost for new
issue, legal cost.
2. No Formalities
Second
reason for dividend retention is finance without formalities. We know that
other financing involves a lot of legal formalities. These formalities are
related to advertisement of offer, receiving of funds & utilization,
condition for new issues.
3. Trend of Payment
Many
organizations follow a trend of dividend. Therefore a specific percentage is
paid to the equity holder as per market expectation and remaining amount is
retained. It is important to remember that this trend play important role to
maintain stability of stock market price of company.
4. Management Effort
A
lot of management effort and time is required to handle the new issue,
therefore company prefer to use retained earnings.
