The dividend puzzle is a concept in finance

Finance

"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

 in which companies that pay dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

s are rewarded by investor

Investor

An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

s with higher valuation

Valuation (finance)

In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...

s, even though, according to many economists

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, it should not matter to investors whether a firm pays dividends or not. The reasoning goes that dividends, from the investor’s point of view, should have no effect on the process of valuing equity because the investor already owns the firm and, thus, he/she should be indifferent to either getting the dividends or having them re-invested in the firm.

The puzzle evolved from the Modigliani-Miller theorem

Modigliani-Miller theorem

The Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...

s of 1959 and 1961.

The reasons for the dividend puzzle have been attributed to a wide range of factors, including, among others, uncertainties, psychological

Psychology

Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...

/behavioral economics issues, tax-related matters and asymmetric information.