Dividend policy in network industries

Dividend policy is one of the key measures in corporate finance for all corporations and across all industries. Usually corporations retain a portion of their earnings and pay the residual as a dividend to stockholders. However, how companies set their dividend payments can vary significantly and is often viewed as a puzzle. A firm’s decision about dividends is often mixed with other financing and investment decisions. Some firms pay low dividends because management is optimistic about the firm’s future and wishes to retain earnings for expansion. In this case the dividend policy is a by-product of the firm’s capital budgeting decision. Other firms finance their capital expenditures largely by borrowing. This strategy releases cash for dividends. In this case the firm’s dividend is a by-product of the capital structure policy.