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A Regret‐Theoretic Explanation Of Corporate Dividend Policy

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  • Chinmoy Ghosh

Abstract

This paper uses Regret Theory to explain some survey results on managers' dividend policy decisions under uncertainty. Regret Theory suggests that when an individual chooses an action from a number of uncertain alternatives, his decision is influenced by the potential post‐decision regret (pride) he feels on his inabilty (ability) to select the option with the best outcome. Based on this premise, we argue that (1) the decision to pay dividends and simultaneously raise venture capital from external sources is attributable to managerial aversion for regret at the failure of a risky investment opportunity implemented with internal funds generated by a conservative dividend policy; and (2) the decision to support dividends with borrowed funds when earnings are declining is motivated by the prospect that an improvement in the firm's financial condition will make the managers proud that their judgment has helped avert a potential crisis for the firm without any wealth loss to its shareholders.

Suggested Citation

  • Chinmoy Ghosh, 1993. "A Regret‐Theoretic Explanation Of Corporate Dividend Policy," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 20(4), pages 559-573, June.
    • Handle: RePEc:bla:jbfnac:v:20:y:1993:i:4:p:559-573
    DOI: 10.1111/j.1468-5957.1993.tb00274.x
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    References listed on IDEAS

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