The course I have taught more than any other at the DeVoe School of Business is Managerial Finance. In order to achieve their MBAs, many students have endured my lectures and homework problems on time value of money, the strategic use of debt, and the management of net working capital. Deep in the MBA Finance course, we come to a discussion on dividend policy. This seems like an obscure topic to many students, as it is usually the purview of top executives and investment analysts. However, I have found interesting parallels between dividend policy and other important topics in personal finance.
We teach there are reasons for and against high dividends, which executives must weigh in setting their policy. Many of the reasons for increased dividends are as much psychological as they are mathematical. Executives know dividends send important signals to investors. Increased dividends inform investors that the company is stable and its future looks bright. Some investors prefer stocks that pay high dividends because it helps them control their budgets. They invest their “nest egg” into stocks with high dividend payouts to establish a regular income to support a specific standard of living. It is a behavioral finance technique—a way to self-discipline themselves.
Dividends also have important implications for the agency problem, which arises when executives are tempted to pursue their own interests above their investors’. Increasing dividends reduces free cash flow, decreasing the opportunity for executives to squander investors’ money on perquisites like fancy corporate jets. Furthermore, high dividends tend to remind executives who they work for, establishing a clear pecking order from owner to manager.
The reasons for and against high dividends have been the subject of scholarly study and debate for decades. However, over a thousand years before the first university was formed and professors began their academic deliberations, we find the same issues discussed in the Bible. Specifically, I am referring to tithing. The parallels between dividend policy theory and the Bible’s instructions on tithing are fascinating.
Tithing has the same psychological impact as dividends. It sends a heavenly message of gratitude to the Owner, that things are under control and our future is bright. Tithing helps to establish self-discipline, and combats the agency problem. It reduces the opportunity for us to squander the Owner’s resources. It also serves to remind us that we are merely managers, not the Founder. We have a fiduciary duty to God to be good stewards of His creation. When we have a lot of free cash flow, God—as the Owner and Creator—expects us to invest these resources in profitable growth opportunities which honor Him.
So the next time the offering plate is passed around, and it comes time to declare our regular dividend, perhaps we should all open our employee handbooks to read the value statement set out by the Chairman of the Board, Jesus Christ, who said, “Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven… For where your treasure is, there your heart will be also” (Matthew 6:19-21, English Standard Version).