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Faith Based Investing: Why Do Shareholders Receive Dividends

Hofstra Univ. Legal Studies Research Paper No. 07-28

Research in Law and Economics, Vol. 24, 2008

33 Pages Posted: 11 Sep 2007  

Daniel J.H. Greenwood

Hofstra University College of Law

Abstract

Everyone knows that shares receive dividends because they are entitled to the residual returns of a public corporation. Everyone is wrong. Basic principles of market competition, applied to the actual law of corporations, sharply contradict the conventional wisdom. First, shareholders are not residual claimants in any legal or economic sense so long as the corporation remains in existence. Second, standard economic theory implies that shareholders should receive dividends only under non-competitive conditions, and not often even then.

Instead, shareholder returns depend on shareholder power-more the soft power of ideology than the hard power of law and the legally structured market-at least as much as on underlying business success. If current trends continue, we can expect the shareholder share of corporate returns to diminish, as managers find shareholder-centered ideologies less congenial. Moreover, because the struggle is largely over rents, if the current results are unattractive, we can change the rules, modify the power of the various players, or seek to persuade them to accept different views of their ethical rights and obligations.

Keywords: corporations, corporate governance, dividend policy, shareholder rights

Suggested Citation

Greenwood, Daniel J.H., Faith Based Investing: Why Do Shareholders Receive Dividends. Hofstra Univ. Legal Studies Research Paper No. 07-28; Research in Law and Economics, Vol. 24, 2008. Available at SSRN: https://ssrn.com/abstract=1010959

Daniel J.H. Greenwood (Contact Author)

Hofstra University College of Law ( email )

121 Hofstra University
Hempstead, NY 11549
United States
516-463-7013 (Phone)

HOME PAGE: http://law.hofstra.edu/greenwood

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