Dividend Implications for companies

Some studies, however, have demonstrated that companies that paydividends have higher earnings growth, suggesting that dividendpayments may be evidence of confidence in earnings growth andsufficient profitability to fund future expansion.

Even though companies' rewards shareholder for the money they hadinvested in the company, the dividend has certain implications forcompanies and its balance sheet. Whatever be the dividend types (Cashor Stock) it reduces the retained earnings by the amount of thedividends. When dividend is declared, the money is written in aliability side with a heading ‘dividend payable'. This liability isadjusted when the company actually makes payment on the payments date,usually few days after the ex-dividends date.

In the case of stock dividend (bonus share) even after the amountremoved from the retained earnings is added to the paid up capital andissued new shares to shareholders at par value. The par value of eachstock does not change, however the outstanding shares is increased,retained earnings is reduced and market capitalization heaved upward.