Refutation of the Theory of “Compound Interest Effect” in the Capitalization of Dividends

Illia Morhachov () and Ievgen Ovcharenko ()
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Illia Morhachov: Candidate of Economic Sciences, Associate Professor Volodymyr Dahl East Ukrainian National University, Severodonetsk, Ukraine
Ievgen Ovcharenko: Doctor of Economic Sciences, Professor Volodymyr Dahl East Ukrainian National University, Severodonetsk, Ukraine

Management Theory and Studies for Rural Business and Infrastructure Development, 2021, vol. 43, issue 1, 13-20

Abstract: The purpose of this work is to clarify the causes and circumstances of the negative influence of the compound interest effect in investment processes and to refute the theory of the compound interest effect in the capitalization of dividends. The article considers the peculiarities of the negative effect of the compound interest effect in terms of capitalization of dividends. The reasons and circumstances of the negative value of the corresponding effect in investment processes were specified. It is stated that the effect of compound interest is often not positive at all in case of capitalization of dividends on shares. Dividend tax neutralizes the “magic of compound interest” in the case of appropriate capitalization of dividends. The payment of dividends is economically feasible only when the investor plans to direct these funds to consumption and not to capitalization. To improve the conditions of investment processes, the need to reduce the tax on dividends has been proven. It showed the possibility of avoiding the tax on dividends for investors in the case of its relatively large size. The material of the article allows us to refute the theory of the “compound interest effect” in the capitalization of dividends.

Keywords: compound interest effect; dividends; capitalization; dividend tax; investment processes (search for similar items in EconPapers)
JEL-codes: M10 Q16 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:mtrbid:v:43:y:2021:i:1:p:13-20:n:1

DOI: 10.15544/mts.2021.02

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