Value Relevance of Profit Available for Dividend

According to some research, the profit available for dividend is undervalued. This paper examines the determinants of undervaluation based on the tax and agency hypotheses. First, the influence of taxation on dividend income on the valuation of companies in Japan is examined. However, evidence supporting the tax hypothesis cannot be provided. Next, this paper examines the agency hypothesis, employing the ratio dividend divided by the profit available for dividend as the proxy variable of agency cost. The result is consistent with the hypothesis: the profit available for dividend in a company with insufficient dividend payout is undervalued.