Dividend policy and corporate valuation
Abstract
Purpose
The purpose of this paper is to investigate an empirical solution to dividend policy relevance.
Design/methodology/approach
The paper combines measures of firm maturity in a logit regression to define a comprehensive life-cycle model of the likelihood of dividend payment. The valuation of firms that conform to the model is compared to the valuation of firms that do not fit the model. Valuation is measured by the market to book (M/B) ratio.
Findings
The analysis indicates that dividend policy is related to firm value. Dividend-paying firms that fit the life-cycle model have a higher median valuation than dividend-paying firms that do not fit the life-cycle model. Similarly, non-paying firms that fit the life-cycle model have a higher median valuation than non-paying firms that do not fit the life-cycle model. The results also provide evidence that the disappearing dividend phenomenon is related to shifts in valuation.
Research limitations/implications
This paper focuses on the payment of dividends. Stock repurchases are not considered.
Practical implications
The results indicate that dividend policy is related to firm value. Approximately 15 percent of sample observations have a dividend policy counter to the life-cycle model.
Originality/value
This paper shows that the relation between a firm’s M/B ratio and dividend policy changes over the firm’s life-cycle. It also shows that the catering motive for dividends is strongest among firms that are outliers in the life-cycle model and firms of intermediate maturity.
Keywords
Citation
Hauser, R. and Thornton Jr, J.H. (2017), "Dividend policy and corporate valuation", Managerial Finance, Vol. 43 No. 6, pp. 663-678. https://doi.org/10.1108/MF-05-2015-0157
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited