Question

Explain the following factor affecting the dividend decision of a company:

Legal Constraints

Answer 1

Legal constraints, such as corporate rules, regulations, and contractual commitments, might limit a company's capacity to pay dividends. Companies must follow regulatory requirements and constraints on dividend payments, such as solvency tests, capital conservation standards, and loan or bond covenants. Non-compliance with legal requirements can result in legal responsibilities, financial penalties, and reputational damage.