Relevance of Signaling and Smoothing Approaches to Dividend: A Study of Indian IT Sector‪.‬

Introduction Wealth maximization and value creation is a wellthought and crystallized goal of any good enterprise. It is a commonly accepted belief that shareholder wealth maximization is mirrored in the company's share prices and thus it can be categorically stated by various thinkers that prices are a critical determinant of shareholders' wealth. Accordingly, corporate managers' dividend policy decisions affect the common stock prices and thereby have an impact on wealth of the shareholders. A company's dividend decision has the effect of dividing it's after tax earnings into two categories namely the retained earnings and cash out flows in the form of dividend payments. The most important thing to be identified is the basis on which companies take their dividend decision. Thus, dividend remains one of the greatest enigmas of modern finance. As long as a company has investment projects whose returns exceed the cost of capital, it will retain its profit to finance such projects; such excess profits left over after financing all profitable investment projects, would be distributed to shareholders in the form of dividends. Here dividend becomes a passive residual determined strictly by availability of acceptable investment projects .In this case the amount of dividend payout will oscillate from year to year keeping with fluctuations in amounts of acceptable investment projects available to the company. This approach implies that dividends are irrelevant for valuation of the company's share.