Paying generous dividends and simultaneously raising new equity capital are commonly observed in financial markets.Issuing new equity requiresto pay expensiveflotation costs which usually account for more than 10 percent of the new equity capital.The payout policy seems to be uneconomic and inexplicable because the practice looks like firms raising money from one hand and paying out the same money through the other hand.Dose any economic rationale justify the payout policy adopted by firms?