The purpose of this paper is to provide an overview and synthesis of some important literature on dividend policy, chronicle changing perspectives and trends, provide stylized…
Abstract
Purpose
The purpose of this paper is to provide an overview and synthesis of some important literature on dividend policy, chronicle changing perspectives and trends, provide stylized facts, offer practical implications, and suggest avenues for future research.
Design/methodology/approach
The authors provide a survey of literature surveys with a focus on insights for paying cash dividends.
Findings
The analysis of literature surveys on dividend policy provides some stylized facts. For example, US evidence indicates that the importance of cash dividends as a part of investors’ total returns has declined over time. Share repurchases now play an increasingly important role in payout policy in countries permitting stock buybacks. The popular view is that dividend policy is important, as evidenced by the large amount of money involved and the attention that firms, security analysts, and investors give to dividends. Firms tend to follow a managed dividend policy rather than a residual dividend policy, which involves paying dividends from earnings left over after meeting investment needs while maintaining its target capital structure. Certain determinants of cash dividends are consistently important over time in shaping actual dividend policies including the stability of past dividends and current and anticipated earnings. No universal set of factors is appropriate for all firms because dividend policy is sensitive to numerous factors including firm characteristics, market characteristics, and substitute forms of dividends. Universal or one-size-fits-all theories or explanations for why companies pay dividends are too simplistic.
Practical implications
The dividend puzzle remains an important topic in modern finance.
Originality/value
This is the first a survey of literature surveys on cash dividends.
Details
Keywords
– The purpose of this paper is to investigate how and why a firm’s product market power affects its dividend policy.
Abstract
Purpose
The purpose of this paper is to investigate how and why a firm’s product market power affects its dividend policy.
Design/methodology/approach
This paper uses three measures of market power? The degree of import competition, Herfindahl-Hirschman index, and Lerner Index? To examine how a firm’s product market power affects its dividend policy. Further, it proposes and tests a risk-based explanation for this impact.
Findings
This paper shows that market power positively affects the dividend decision, in terms of both the probability of paying a dividend and the amount of dividend payment. It also provides evidence that the route through which market power affects the dividend decision is business risk: firms with less market power are riskier and hence less likely to pay dividends than firms with more market power.
Practical implications
The results show that product market power may have played an important role in reshaping dividend policy of corporate America.
Originality/value
This study documents the relevance of market power behind dividend policy and therefore adds to the knowledge on the relationship between product markets and corporate financial policies, which is an important and understudied area of corporate finance.
Details
Keywords
Michael L. Lemmon and Thanh Nguyen
The positive relationship between dividend yield and risk-adjusted return, which is called the dividend yield effect, is well documented in the US market. Yet, the drivers of the…
Abstract
Purpose
The positive relationship between dividend yield and risk-adjusted return, which is called the dividend yield effect, is well documented in the US market. Yet, the drivers of the yield effect are unclear. Some argue this evidence is consistent with the prediction that the investor-level tax burden is capitalized in stock prices, also known as the tax capitalization hypothesis. Still others contend that nontax omitted factors drive the yield effect. The purpose of this paper is to contribute to the debate by exploring if the yield effect occurs in Hong Kong market where no taxes exist on either dividend income or capital gain.
Design/methodology/approach
The authors use two main approaches to detect the dividend yield effect. The first approach groups stocks into portfolios based on dividend yields and tests for the presence of a yield effect at the portfolio level. The second approach employs the Fama-MacBeth methodology at the firm level and tests if a yield effect is existent after controlling for firm characteristics known to explain stock returns.
Findings
The paper documents a robust dividend yield effect in the Hong Kong market and suggests that nontax reasons help to explain the yield effect.
Originality/value
Tax capitalization is a long-standing question in financial economics and the research evidence is mixed. The findings do not completely rule out the tax capitalization hypothesis. The main contribution is to illustrate the difficulty of conducting a powerful test of this hypothesis in practice and to urge caution in interpreting the dividend yield effect as evidence in support of this hypothesis.
Details
Keywords
Thanh T. Nguyen, Ninon K. Sutton and Dung (June) Pham
The purpose of this paper is to reexamine the stock price drifts after open-market stock repurchase announcements by differentiating actual repurchases from repurchase…
Abstract
Purpose
The purpose of this paper is to reexamine the stock price drifts after open-market stock repurchase announcements by differentiating actual repurchases from repurchase announcements and by controlling for the repurchasing firms’ earnings improvement in the announcement year relative to the prior year.
Design/methodology/approach
The authors use the calendar-time method and matching method based on different criteria to calculate the post-announcement abnormal returns.
Findings
The results show that only firms actually repurchasing their shares exhibit a positive post-announcement drift. More importantly, the authors find that these repurchasing firms have the same post-announcement drift as their matching firms that have similar size and earnings performance but do not repurchase. This supports the argument that the post-repurchase announcement drift found in previous studies is not a distinct anomaly but the post-earnings announcement drift in disguise.
Social implications
The post-repurchase announcement drift found in previous studies is the post-earnings announcement drift in disguise.
Originality/value
The study shows that because high earnings performance positively relates to real repurchase activities, controlling for earnings performance in examining whether a drift occurs after repurchase announcements.
Details
Keywords
H. Kent Baker and Sujata Kapoor
The purpose of this paper is to survey managers of dividend-paying firms listed on the National Stock Exchange (NSE) in India to learn their views about the factors influencing…
Abstract
Purpose
The purpose of this paper is to survey managers of dividend-paying firms listed on the National Stock Exchange (NSE) in India to learn their views about the factors influencing dividend policy, dividend issues, and explanations for paying cash dividends and repurchasing shares. The authors compare the results to other dividend surveys based on firms in Indonesia, Canada, and the USA.
Design/methodology/approach
The authors use questionnaire to gather primary data from a sample of 500 firms listed on the NSE.
Findings
The most important determinants of dividends involve earnings (the stability of earnings as well as the level of current and expected future earnings) and the pattern of past dividends. Comparing the overall rankings of the 21 factors by respondents from Indian firms to those of Indonesian, Canadian, and US firms reveals statistically significant correlations. Respondents also perceive that dividend policy affects firm value. Respondents also view maintaining an uninterrupted record of dividends as important. The most highly supported explanations for paying cash dividends concern signaling, the firm life cycle, and catering. Although none of the theories of repurchasing shares is dominant, respondents provide little support for the agency explanation.
Research limitations/implications
Although the tests suggest that the sample does not suffer from non-response bias, the findings should be viewed as suggestive rather than definitive because of the relatively low response rate.
Originality/value
The paper presents new evidence about dividend policy of Indian firms. To the knowledge, this is the most comprehensive survey of Indian firms to date that captures managerial perceptions on both cash dividends and share repurchases.
Details
Keywords
Neil L. Fargher and Robert A. Weigand
Purpose– The purpose of this paper is to examine cross‐sectional differences in the profits, returns and risk of high‐ and low‐market‐to‐book ratios (M/B) stocks before and after…
Abstract
Purpose– The purpose of this paper is to examine cross‐sectional differences in the profits, returns and risk of high‐ and low‐market‐to‐book ratios (M/B) stocks before and after the initiation of regular cash dividend payments. Design/methodology/approach– This study uses parametric and non‐parametric statistics and ordinary least squares regression to test for differences in the profits, returns and risk of high‐ and low‐M/B stocks before and after dividend initiation. Findings– Low‐M/B stocks display the most positive price reaction to dividend initiation announcements. High‐M/B firms have larger profits, cash levels and capital expenditure before and at the time of dividend initiation, but more closely resemble the low‐M/B firms in terms of these characteristics within three years following dividend initiation. Excess returns earned by low‐M/B firms are related to decreases in systematic risk, while the returns of high‐M/B firms are related to their higher profitability. Research limitations/implications– Averaging results from 1965‐2000 does not account for possible changes in the information content of dividend initiations over time (as evidenced by steadily declining dividend yields over this period). Practical implications– The findings are consistent with the idea that firms begin paying dividends as they are maturing into a slower growth period, and do not support the idea that dividend initiation signals faster future earnings growth. Originality/value– The analysis adds to the body of knowledge by explicitly conditioning the expectations from various dividend theories based upon individual firms’ growth phase as reflected in their M/B ratios, and suggests that signaling, agency and risk explanations for dividends must be considered jointly with a firm's growth prospects when studying dividend events.
Details
Keywords
Robert A. Weigand and H. Kent Baker
The purpose of this paper is to provide a synthesis of the literature on the changing perspectives of corporate distribution policy.
Abstract
Purpose
The purpose of this paper is to provide a synthesis of the literature on the changing perspectives of corporate distribution policy.
Design/methodology/approach
This paper synthesizes and interprets the theoretical, empirical and survey‐based research on corporate payout policy.
Findings
Dividends once constituted a prominent part of an investor's total return, but this role has declined over time. Although many companies still pay cash dividends, share repurchases have risen dramatically and are now a significant component of payout.
Research limitations/implications
New theories and perspectives on corporate distribution are likely to be introduced; while this paper represents an up‐to‐date view on the topic, it is not possible to anticipate new research developments that may affect some of the perspectives expressed herein.
Practical implications
No single explanation fully accounts for the changes in distribution policy, most notably, the declining incidence of dividend‐paying firms and the increasing level of repurchase activity. Factors that explain the popularity of share repurchases in the USA include the improved regulatory environment, economic conditions, and the flexibility of repurchases relative to dividends. Developing a comprehensive model that explains the choice between dividends and share repurchase remains a challenge facing researchers.
Originality/value
The paper adds to the body of knowledge by providing an integrated perspective on dividends and share repurchase, summarizing decades of theoretical, empirical, and survey‐based research.
Details
Keywords
Provides a new paradigm capable of integrating and developing research, which, it proposes, gives a better understanding of industrial buyer behaviours. Concludes that the model…
Abstract
Provides a new paradigm capable of integrating and developing research, which, it proposes, gives a better understanding of industrial buyer behaviours. Concludes that the model provided can be used by practitioners as a basis on which to form their marketing message, but not its style of delivery or specific direction.
Details
Keywords
David B. Audretsch and Erik E. Lehmann
We study the implications of ownership and its induced incentives on firm survival on the stock market for young and high‐tech firms. Using a unique data set of all 341 firms…
Abstract
We study the implications of ownership and its induced incentives on firm survival on the stock market for young and high‐tech firms. Using a unique data set of all 341 firms listed on the Neuer Markt, the German equivalent of the NASDAQ, our results differ from studies on more traditional firms. Ownership by CEOs has no influence on firm survival when introducing measurements of human capital and intellectual property rights. This confirms assumptions that firms in the knowledge based industries differ in their governance structure from traditional firms.