Final answer:
The debate over dividend policy being relevant or irrelevant ties into financial theory; one view holds that dividends signal company health and influence valuation, while the other argues, based on Modigliani and Miller’s theory, that in a perfect market, dividend policy does not affect firm value. Decisions about dividends in public and private companies are made by management and the board of directors, with public company shareholders having some influence through voting rights.
Step-by-step explanation:
The question of whether dividend policy is relevant or irrelevant is a matter of financial theory that has been debated among economists and financial professionals. The relevance or irrelevance of dividends ties into whether these payouts impact a company's valuation and the decision-making of investors. Two main schools of thought address this topic: one that believes dividend policy is relevant and another that considers it to be irrelevant.
Those who argue that dividend policy is relevant suggest that dividends provide signals about a company's financial health and future prospects, influence stock price, and affect investor satisfaction. On the other hand, the irrelevance perspective, largely based on Modigliani and Miller’s dividend irrelevance theory, holds that in a perfect market, the value of a firm is determined by its earning power and investment policy, not by how profits are distributed between dividends and retained earnings.
In terms of practical decision-making within a firm, whether it is private or public, the management and board of directors are tasked with making decisions about issuing stock, paying dividends, or reinvesting profits. However, shareholders in public companies have voting rights that can influence these decisions, especially when it comes to corporate policies and leadership.