Dilution

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En provenance du cours de Yale University

Financial Markets

1725 notes

Yale University

Financial Markets

1725 notes

An overview of the ideas, methods, and institutions that permit human society to manage risks and foster enterprise. Emphasis on financially-savvy leadership skills. Description of practices today and analysis of prospects for the future. Introduction to risk management and behavioral finance principles to understand the real-world functioning of securities, insurance, and banking industries. The ultimate goal of this course is using such industries effectively and towards a better society.

À partir de la leçon

Module 3

Stocks, bonds, dividends, shares, market caps; what are these? Who needs them? Why? Module 3 explores these concepts, along with corporation basics and some basic financial markets history.

Market Capitalization by Country6:50

The Corporation8:10

Shares and Dividends11:37

Common vs. Preferred2:32

Corporate Charter8:35

Corporations Raise Money8:38

Share Repurchase6:32

PDV of Expected Dividends11:27

Why do firms pay dividends?8:24

Rencontrer les enseignants

Robert Shiller
Sterling Professor of Economics at Yale University
Economics

Sometimes companies will issue a dividend in shares,

and it's called a stock dividend.

So you might get a letter from your broker saying, congratulations.

The company has now paid a stock dividend of 5%.

So you had 100 shares, you now have 105 shares.

And the price per share is $30, so

you've got five new shares.

It's like getting a dividend of $150.

But that's what most people think.

What is the next question you ask your broker?

Let me get this straight.

The company has issued new shares, so that I can be paid a dividend in shares.

And I now have 105 shares,

is that the same as getting $150 in cash?

Now think about it.

The question you would ask your broker, do you see where I'm going with this?

The question you would ask your broker is, wait a minute,

every share holder is getting these share dividends,

it's equity, they can't pay me a stock dividend without paying the other.

So the total number of shares went up by 5%.

So I'm calculating what fraction of the company I own, it's the same!

So then you would go to the company and say, what is this nonsense?

You're paying a dividend and shares, I figured out that means nothing.

The company would be kind of embarrassed if you asked that question.

They would say, what would they say?

They might say if you could get them on the phone, say yes you are diluted,

you did get shares and you were diluted down by the same amount.

But we think this price per share will hold, and it's going to be good for you.

They'll just try to talk their way out of it.

Typically they issue stock dividends as just, it's kind of a trick.

This is fishing for fools, [LAUGH] but they could be well motivated in doing it.

They have to keep your morale up.

Maybe they weren't going to pay a cash dividend, so let's do a stock dividend.

Let's make a public statement that the company's doing really well.

And if anyone brings up dilution you say,

but no, we're doing so well.

We wouldn't issue a stock dividend if we thought that it would make the price per

share fall.

So a few of us might say, okay, I can do that.

Now there was a time once when the Internal Revenue Service

proposed taxing stock dividends.

Well, why not?

You just got a dividend and you should declare it on your taxes.

So some companies running to the IRS, and

now they explained it with perfect clarity to the tax collector.

No, no, no you've got to understand.

This isn't really a dividend.

This is just a paper or something.

You can't possibly tax them on this, because they didn't get anything.

So the IRS backed down and it doesn't tax stock dividends.

>> You just talk briefly to how some firms never pay dividends or

to go many years without paying them.

Why do these firms think it's optimal to do so

when these other firms boast about always paying dividends?

>> Well typically the firms that never pay

a dividend are young firms in a rapidly growing business,

where they tell investor, it's a different kind of investor.

The one that by stocks that have never missed pending a dividend,

that's grandma, okay?

[LAUGH] And grandpa.

They have old fashion ideas, but

young people are more likely to buy stock that doesn't pay a dividend.

It's also especially popular in the last 20 or 30 years.

That's a long time for you, I know.

[LAUGH] When the Internet started loading up steam in the 1990's.

They were setting up companies like Amazon and was it Google, I'm not sure

about the years, but around that time a lot of young companies were set up.

And people said, this is an opportunity.

Right now, there's this revolution in the Internet.

You've gotta jump on it, because it's going to go to the first mover.

And to a significant sense, that's true.

So the kind of people who would invest in some startup Internet company back then.

So we'd say don't pay me a dividend,

I want you to move otherwise you'll be a loser.

So in fact it almost became reversed

that companies prided themselves on never paying a dividend.

It used to be that the New York Stock Exchange

wouldn't list a company that never paid a dividend.

And it was prestigious to be listed on the New York Stock Exchange, but

there is this other young exchange called NASDAQ that would

list you whether you've paid a dividend or not.

So Microsoft went on NASDAQ not on the New York Stock Exchange.

Then years later, when Microsoft became big and important.

The New York Stock Exchange said, in its dignity, said, we have

now decided that Microsoft is okay for listing on the New York Stock Exchange.

But you know what Bill Gates did?

He said, no way.

I don't care about your prestige.

[LAUGH] NASDAQ is better, because it's the go for it companies.

So you're right, there's different subcultures.

Some which appreciate a dividend, and some which think it's the sign that you're old

school, but you know firms have clientele.

Investors that invest in their firm.

And so you appeal to your clientele, the old utility companies are never

going to get the young hot shot investors anyway.

[LAUGH]

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