Historical payout policy 1

Profitability vs. Investment Needs 2

The previous analysis shows that Linear has ample resources to pay out dividends Costs of holding cash in the firm – Linear should payout (dividend or repurchase) now if t c > t P (i.e., it is more costly to hold cash in the firm) – Agency Managers could use the cash to pursue activities that do not benefit shareholders No evidence – Linear has stuck to core business, no plans for future acquisitions 3

What if the firm used its cash to give a payout to shareholders? 4

Why do firms pay dividends? Taxes – historically, dividends have been taxed at a higher rate Signaling – To address asymmetric information. Managers use dividends to signal good prospects about a firm Agency – Managers can prove they will not waste resources by committing to regular dividend payments Clientele effects – Investors differ in taxes, transactions costs Taxes – pension funds are tax-exempt and may prefer dividends Transactions costs – small investors may prefer dividends to selling shares (to create “homemade dividends”) to avoid high transactions costs 5