Briefly describe the determinants of dividend policy.

Determinants of dividend policy are: Legal constraints: As regards cash dividend policy several legal constraints bear upon it - a firm may not pay a dividend which will impair capital. Dividend must be paid out of firm's earnings/current earnings. Contract/Agreements for bonds/loans may restrict dividend payments. The purpose of legal restriction is to ensure that the payment of dividend may not cause insolvency. Financial constraint: There are financial constraints to Dividend Policy. A firm can pay dividend only to the extent that it has cash to disburse; a firm can't pay dividend when its earnings are in account receivables or firm does not have adequate liquidity. Economic Constraints: Besides, there are economic constraints also. When the value of dividend affects the value of the firm then there must be some optimum level of dividend, which maximises the market price of the firm's stock. Nature of Business Conducted by a Company: A company having a business of the nature which gives regular earnings may like to have a stable and consistent dividend policy. Period of Existence of the Company: The length of existence of the company affects dividend policy. Companies having long standing experience may have a better dividend policy than the new companies. Type of Company/Organisation: The type of company/organisation whether a private limited company or a public limited company affects dividend decisions. Market Conditions: Business cycles, boom and depression, affects dividend decisions. In a depressed market, higher dividend declaration are used to market securities for creating a better image of the company. During the boom the company may like to save more, create reserves for growth and expansion or meeting its working capital requirements. Financial Arrangement: In case of financial arrangements being entered into or being planned like merger or amalgamation with another company, liberal policy of dividend distribution is followed to make the share stock more attractive. Change in Government Policies: Changes in Government Policies particularly those affecting earnings of the company are taken into consideration in settling dividend decisions. For example, higher rate of taxation, fiscal poly, industrial policy etc.