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Homework answers / question archive / Milton Friedman's philosophy (Nobel prize winning economist) Firms should only retain earnings to extent they can invest in projects with as high of a return as investors could earn investing in other firms with similar risk profiles Paying dividends reduces each share's value by the dividend amount
Milton Friedman's philosophy (Nobel prize winning economist) Firms should only retain earnings to extent they can invest in projects with as high of a return as investors could earn investing in other firms with similar risk profiles Paying dividends reduces each share's value by the dividend amount. If the firm chooses not to pay dividends, investors who want dividends can sell their shares to realize income not supplied by dividends
According to Milton Friedman, companies should not pay dividends because paying dividends reduces the value of the share of the company by the amount of the dividends paid.
Instead of paying the dividends, the company should invest the money in various projects which give high returns. The company not paying dividends can also use this money to reinvest in the existing projects and develop the productivity of the company. This will help the company develop even more.
The investors who want dividends can sell off their shares to realise income. But paying dividends will reduce the value of shares. So dividends should not be paid and money should be invested for company's growth, according to Friedman.
