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Book part
Publication date: 27 November 2017

Benjamin Bae and Mahdy F. Elhusseiny

This chapter investigates the relationship between financial measures and dividend payout policy choices of firms. We examine why firms choose to pay dividends

Abstract

This chapter investigates the relationship between financial measures and dividend payout policy choices of firms. We examine why firms choose to pay dividends continuously, intermittently, or not pay them. Specifically, the findings provide evidence that firms with relatively larger debts tend to pay dividends less frequently than firms with smaller debts.

The results also suggest that good financial performers are more likely to pay dividends more regularly. Additionally, the results of this study indicate that highly leveraged firms tend to make less frequent payouts than lowly leveraged firms.

Overall, this research adds to our understanding of firms’ dividend payout policy choices. First, evidence on the relationship between the various types of financial measures and firms’ choice of dividend payout frequencies should be useful to investors. Second, the findings of this study provide financial statement users with useful information about the firm’s dividend payout patterns. Third, in general, it also adds to the accounting and finance literature on dividends.

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Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

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Book part
Publication date: 27 November 2017

Thaddeus Sim and Ronald H. Wright

Historical stock prices have long been used to evaluate a stock’s future returns as well as the risks associated with those returns. Similarly, historical dividends have…

Abstract

Historical stock prices have long been used to evaluate a stock’s future returns as well as the risks associated with those returns. Similarly, historical dividends have been used to evaluate the intrinsic value of a stock using, among other methods, a dividend discount model. In this chapter, we propose an alternate use of the dividend discount model to enable an investor to assess the risks associated with a particular stock based on its dividend history. In traditional applications of the dividend discount model for stock valuation, the value of a stock is the net present value of its future cash dividends. We propose an alternative approach in which we calculate the internal rate of return for a stream of future cash dividends assuming the current stock price. We use a bootstrapping approach to generate a stream of future cash dividends, and use a Monte Carlo simulation approach to run multiple trials of the model. The probability distribution of the internal rates of return obtained from the simulation model provides an investor with an expected percentage return and the standard deviation of the return for the stock. This allows an investor to not only compare the expected internal rates of return for a group of stocks but to also evaluate the associated risks. We illustrate this internal rate of return approach using stocks that make up the Dow Jones Industrial Average.

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Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

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Article
Publication date: 23 November 2021

Jong Hwa Lee

This study discovers the relation between corporate governance factors and earnings quality and finds that increases in dividends and foreign ownership deter earnings…

Abstract

This study discovers the relation between corporate governance factors and earnings quality and finds that increases in dividends and foreign ownership deter earnings management. The author shows that dividend increases and foreign ownership enhance earnings quality, but they appear to be substitutes in that role. In other words, as foreign ownership increases, the influence of dividends in increasing earnings quality decreases. Improving transparency through dividend increases and monitoring by foreign institutional investors are substitutes in preventing earnings management.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1229-988X

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Article
Publication date: 19 April 2011

John Consler, Greg M. Lepak and Susan F. Havranek

The purpose of this paper is to compare the relative power of operating cash flow and earnings in the prediction of dividends.

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4701

Abstract

Purpose

The purpose of this paper is to compare the relative power of operating cash flow and earnings in the prediction of dividends.

Design/methodology/approach

A linear mixed effects model is used in terms of selected model fit criteria.

Findings

Based on the selected model fit criteria, cash flow per share is shown to produce a better fit than earnings per share, but it cannot be said how much better.

Research limitations/implications

Quarterly CRSP and Compustat data from 2000 to 2006 for 1,902 dividend‐paying firms are analyzed. Future work would need a different methodology to determine how much better cash flow is as a predictor of dividends.

Practical implications

Both earnings per share and cash flow per share are found to be reasonable dividend predictors.

Social implications

Additional insight is provided on modeling factors that contribute to a firm's decision to engage or disengage in a dividend payment policy.

Originality/value

The study described in this paper continues work on predicting dividends per share. Results show cash flow per share is a better predictor than earnings per share. Investors and analysts predict dividends as part of their stock valuation work. This study suggests focusing attention on using cash flow per share as the predictor of dividends.

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Managerial Finance, vol. 37 no. 5
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 23 January 2007

N. Bhattacharyya

This paper aims to briefly review principal theories of dividend policy and to summarize empirical evidences on these theories.

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20365

Abstract

Purpose

This paper aims to briefly review principal theories of dividend policy and to summarize empirical evidences on these theories.

Design/methodology/approach

Major theoretical and empirical papers on dividend policy are identified and reviewed.

Findings

It is found that the famous dividend puzzle is still unsolved. Empirical evidence is equivocal and the search for new explanation for dividends continues. Also a number of stylized empirical facts about dividends discovered by researchers are noted.

Research limitations/implications

As with any review paper, the major limitation is that necessarily some papers will be left out. Also as newer research is published the review paper will become more dated.

Originality/value

This paper will give the reader a comprehensive understanding of the dividend puzzle and the major paradigms of dividend policy. The paper will also give the reader the major stylized facts about dividend policy.

Details

Managerial Finance, vol. 33 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 June 2006

John Goddard, David G. McMillan and John O.S. Wilson

We test for the validity of the smoothing and signalling hypotheses of dividend determination.

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4776

Abstract

Purpose

We test for the validity of the smoothing and signalling hypotheses of dividend determination.

Design/methodology/approach

Using a VAR framework we examine the dynamic behaviour of share prices, dividends and earnings for 137 UK manufacturing and service companies, observed over the period 1970‐2003.

Findings

There is strong evidence of a contemporaneous relationship between prices, dividends and earnings, and little evidence of independence between these variables. Some evidence in favour of both the smoothing and the signalling hypothesis is obtained from causality tests, with perhaps more support for the latter hypothesis. However, there is considerable diversity in the causal relationships between prices, dividends and earnings.

Research limitations/implications

No single hypothesis regarding the determination of dividends, and the predictive power of dividends for earnings and prices appears to dominate.

Originality/value

The results presented here are of interest to markets agents in that while they suggest there is no single transition mechanism linking prices, dividends and earnings, nevertheless these three variables are strongly correlated and exhibit varying degrees of causality.

Details

Managerial Finance, vol. 32 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 January 1977

Andrew P. Shepherd

“The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials who must set the…

Abstract

“The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials who must set the policy, but to investors planning portfolios and to economists seeking to understand and appraise the functioning of capital markets. Do companies with generous distribution policies consistently sell at a premium over those with small payments ? Is the reverse ever true ? If so, under what conditions? Is there an optimum payment ratio or range of ratios that maximises the current worth of the shares?”.Although these questions of fact have been the subject of many empirical studies in recent years, no concensus has yet been achieved. Not only does the empirical evidence seem to conflict, but the underlying theory of share price determination cannot be agreed upon. This chapter surveys current theories concerning dividend policy, and seeks to reconcile them under a common set of assumptions. Then the relevant empirical evidence is presented and criticised, and finally a piece of research carried out by the author is discussed.

Details

Management Decision, vol. 15 no. 1
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 2 September 2013

Doddy Setiawan and Lian Kee Phua

This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance…

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5950

Abstract

Purpose

This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia.

Design/methodology/approach

The sample of this research comprises 248 firms from Indonesian Stock Exchange during 2004-2006. This research using Transparency and Disclosure Index (TDI) to measure corporate governance in Indonesia

Findings

We find that TDI are low among Indonesian firms, with a score of 32 per cent out of the maximum point. This score indicates that Indonesian corporate governance is still low. The results show that there is a negative relation between corporate governance and dividend policy in Indonesia. Thus, the Indonesian companies pay more dividends when corporate governance practice is low. This result confirms applicable of substitution theory in Indonesia.

Research limitations/implications

This research focuses on manufacturing industry in Indonesia. Therefore, the conclusions of this research apply on the manufacturing companies in Indonesia

Practical implications

This research shows that companies with poor corporate governance pay dividend higher than companies with better corporate governance. Thus, investor can use this information to make investment decision.

Originality/value

This research provides evidence on the negative effect of corporate governance on dividend policy in Indonesia (substitution theory).

Details

Business Strategy Series, vol. 14 no. 5/6
Type: Research Article
ISSN: 1751-5637

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Article
Publication date: 1 March 2006

Mohammed Amidu and Joshua Abor

This study seeks to examine the determinants of dividend payout ratios of listed companies in Ghana.

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11090

Abstract

Purpose

This study seeks to examine the determinants of dividend payout ratios of listed companies in Ghana.

Design/methodology/approach

The analyses are performed using data derived from the financial statements of firms listed on the Ghana Stock Exchange during a six‐year period. Ordinary Least Squares model is used to estimate the regression equation. Institutional holding is used as a proxy for agency cost. Growth in sales and market‐to‐book value are also used as proxies for investment opportunities.

Findings

The results show positive relationships between dividend payout ratios and profitability, cash flow, and tax. The results also show negative associations between dividend payout and risk, institutional holding, growth and market‐to‐book value. However, the significant variables in the results are profitability, cash flow, sale growth and market‐to‐book value.

Originality/value

The main value of this study is the identification of the factors that influence the dividend payout policy decisions of listed firms in Ghana.

Details

The Journal of Risk Finance, vol. 7 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 31 December 2015

Nan Liu and Jamshid Mehran

The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more…

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1532

Abstract

Purpose

The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more flexible than dividends and managers have a strong desire to maintain dividend levels and dividend payout ratio of the firms.

Design/methodology/approach

The authors first run a Tobit regression to examine whether firms meeting or just beating the quarterly dividend per share threshold exhibit unusually high repurchases, controlling for the factors shown to affect repurchases. The authors then calculate abnormal repurchases and compare firms that would otherwise miss the benchmark with other firms.

Findings

The authors find that firms meeting or just beating the quarterly dividend per share threshold repurchase more shares than other firms, after controlling for the substitution effect, investment opportunities and financial performance. In addition, firms otherwise missing the quarterly dividend per share threshold repurchase abnormally more shares to meet the threshold.

Originality/value

The study contributes to the payout policy literature in the following ways. First, it extends the understanding of the association between dividend payout and repurchase. Second, it contributes to the threshold literature by showing that firms manipulate repurchases in addition to earnings to meet their quarterly dividend per share threshold. Third, it provides support to the survey evidence that firms have a strong desire to maintain their dividend policies.

Details

Managerial Finance, vol. 42 no. 1
Type: Research Article
ISSN: 0307-4358

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