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Book part
Publication date: 4 July 2015

Tarek Eldomiaty, Ola Attia, Wael Mostafa and Mina Kamal

The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the…

Abstract

The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the components of each model is considered, the informative and efficient dividend payout decisions require that managers have to focus on the significant component(s) only. This study examines the cointegration, significance, and explanatory power of those components empirically. The expected outcomes serve two objectives. First, on an academic level, it is interesting to examine the extent to which payout practices meet the premises of the earnings and free cash flow models. The latter considers dividends and financing decisions as two faces of the same coin. Second, on a professional level, the outcomes help focus the management’s efforts on the activities that can be performed when considering a change in dividend growth rates.

This study uses data for the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from 30 June 1989 to 31 March 2011. The methodology includes (a) cointegration analysis in order to test for model specification and (b) classical regression in order to examine the explanatory power of the components of earnings and free cash flow models.

The results conclude that: (a) Dividends growth rates are cointegrated with the two models significantly; (b) Dividend growth rates are significantly and positively associated with growth in sales and cost of goods sold only. Accordingly, these are the two activities that firms’ management need to focus on when considering a decision to change dividend growth rates, (c) The components of the earnings and free cash flow models explain very little of the variations in dividends growth rates. The results are to be considered a call for further research on the external (market-level) determinants that explain the variations in dividends growth rates. Forthcoming research must separate the effects of firm-level and market-level in order to reach clear judgments on the determinants of dividends growth rates.

This study contributes to the related literature in terms of offering updated robust empirical evidence that the decision to change dividend growth rate is discretionary to a large extent. That is, dividend decisions do not match the propositions of the earnings and free cash flow models entirely. In addition, the results offer solid evidence that financing trends in the period 1989–2011 showed heavy dependence on debt financing compared to other related studies that showed heavy dependence on equity financing during the previous period 1974–1984.

Details

Overlaps of Private Sector with Public Sector around the Globe
Type: Book
ISBN: 978-1-78441-956-1

Keywords

Article
Publication date: 21 April 2011

Alan Gregory

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the…

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Abstract

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 15 February 2013

George W. Blazenko and Yufen Fu

The value‐premium is the empirical observation that “value” stocks (low market/book) have higher returns than “growth” stocks (high market/book). The purpose of this paper is to…

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Abstract

Purpose

The value‐premium is the empirical observation that “value” stocks (low market/book) have higher returns than “growth” stocks (high market/book). The purpose of this paper is to propose a new explanation for the value‐premium that the authors call the limits to growth hypothesis.

Design/methodology/approach

To guide the testing, a dynamic equity valuation model was used that has the property that profitability increases risk for value firms in anticipation of future growth‐leverage, whereas, profitability “covers” the capital expenditure costs of growth, which decreases risk for growth firms. Because the authors interpret dividends as a corporate response to growth‐limits, they test for this predicted differential relation between profitability and risk for value versus growth stocks with the returns of profitable dividend‐paying firms.

Findings

It is found that profitability increases returns to a greater extent for dividend‐paying value firms compared to dividend‐paying growth firms, which is consistent with a differential relation between profitability and risk. At the same time, it is also found that growth firms have lower returns than value firms.

Originality/value

The authors use the limits‐to‐growth hypothesis to explain why profitability can either increase or decrease risk. High‐profitability dividend‐paying growth firms have lower returns than low‐profitability dividend‐paying value firms. This value‐premium is consistent with the argument that high profitability “covers” the capital expenditure costs of growth, which decreases risk and, thus, returns. At the same time, profitability increases returns to a greater extent for value stocks compared to growth stocks, which is consistent with the hypothesis that profitability increases risk for value firms in anticipation of future growth‐leverage.

Details

Managerial Finance, vol. 39 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 13 February 2017

Boonlert Jitmaneeroj

This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear…

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Abstract

Purpose

This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear regression model is that the P/E ratio is positively related to the dividend payout ratio. However, none of them investigates the condition under which the positive relationship holds.

Design/methodology/approach

This paper uses the fixed effects model to investigate the conditional and nonlinear relationship between P/E ratio and payout ratio. With the inclusion of fundamental factors and investor sentiment, this model allows for nonlinear relationship to be conditioned on the return on equity and the required rate of return.

Findings

Based on the annual data of industries in the USA over the period of 1998-2014, this paper produces new evidence indicating that when the return on equity is greater (less) than the required rate of return, the P/E ratio and dividend payout ratio exhibit a negative (positive) relationship and positive (negative) convexity.

Practical implications

Due to the curvature relationship between P/E ratio and payout ratio, the corporate managers and stock investors should pay more attention to the reduction in payout ratio than the rising payout ratio and the companies with low payout ratios than the companies with high payout ratios.

Originality/value

No previous study has tackled the issue of conditional and nonlinear relationship between P/E ratio and payout ratio. This paper attempts to fill the gap by allowing for nonlinear relationship conditional on the relative values of the return on equity and the required rate of return.

Details

Review of Accounting and Finance, vol. 16 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 July 2004

Ahsan Habib

This paper empirically examines whether dividends are value‐relevant in Japan by employing Ohlson’s (1995) accounting‐based equity valuation technique. The substantial U.S.‐based…

Abstract

This paper empirically examines whether dividends are value‐relevant in Japan by employing Ohlson’s (1995) accounting‐based equity valuation technique. The substantial U.S.‐based literature on dividends has confirmed the signalling role of dividends in mitigating information asymmetry between managers and investors, and is consistent with an environment characterized by dispersion of ownership. However, the most important corporate governance characteristic that distinguishes Japan from the U.S. is the predominance of inter‐corporate, interlocking ownership in Japan, which reduces information asymmetry and is therefore likely to diminish the role of dividends in mitigating such asymmetries. Pooled regression results provide evidence consistent with this hypothesis. However, even in such an environment, dividends are value relevant for firms that incur losses whilst paying dividends, and also for firms with permanent earnings.

Details

Pacific Accounting Review, vol. 16 no. 2
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 2 May 2023

Aima Khan and Muhammad Azeem Qureshi

The purpose of this study is firm value management through corporate finance policy design and scenario analysis to maximize the firm value.

Abstract

Purpose

The purpose of this study is firm value management through corporate finance policy design and scenario analysis to maximize the firm value.

Design/methodology/approach

The study develops a system dynamics model for an oil firm and incorporates the financial and physical processes to perform the firm valuation. The model is simulated under the current and alternative investment, capital structure and dividend policies of the case firm, assuming different oil and gas price and tax rate scenarios to identify which combination of policies maximizes the firm value.

Findings

The simulation results suggest that lowering the volume of investments, increasing the debt ratio and reducing the dividend payments from the current level increases the share price, given increased oil and gas price expectations and lower tax rates. However, the total firm value outperforms with increased investments toward the end of the simulation period. In case of decreased oil and gas price expectations, lower volume of investments, lower debt ratio and lower dividend payments increase the share prices, given lower taxes.

Originality/value

This study entails significance as it provides a comprehensive financial planning model for an oil firm, which incorporates the complex interactions of key financial and physical processes of the firm. The study contributes to debates on corporate finance policies by integrating multiple theories, accounting for accumulation processes and feedback loops and their non-linear interactions. The study proposes the consideration of combined impact of policies for firm value management.

Details

Journal of Modelling in Management, vol. 18 no. 5
Type: Research Article
ISSN: 1746-5664

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Abstract

Details

Environmental Taxation and the Double Dividend
Type: Book
ISBN: 978-1-84950-848-3

Article
Publication date: 18 July 2008

Scott Pirie and Malcolm Smith

As one of the main purposes of financial statements is to provide relevant information for investors, relationships between share prices and accounting variables have been widely…

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Abstract

Purpose

As one of the main purposes of financial statements is to provide relevant information for investors, relationships between share prices and accounting variables have been widely researched. Early studies focus mainly on earnings, but attention has turned in recent years to valuation models that include the book value of the equity. Many of these studies cite the residual income model as their theoretical base and, with the growing emphasis on shareholder value, residual income measures are more commonly used in the business community to track financial performance. Given such trends, the purpose of this paper is to review the theoretical background of the residual income model and discuss results of empirical studies that use it.

Design/methodology/approach

The study seeks an understanding of how published accounting information relates to share prices in the developed market in Asia, outside Japan. More specifically, the study aims to extend the international literature in market based accounting research by examining empirical evidence on relationships between share prices and the two summary accounting variables of equity book value and earnings for firms listed on the stock exchange in Malaysia.

Findings

The findings imply that, the two accounting variables summarising the balance sheet and the income statement, respectively, are significant factors in the valuation process, and that managers are justified in using the accounting system as a primary source of information for monitoring financial performance.

Originality/value

These findings should be of interest to other researchers, and to managers and investors who currently use or are planning to use residual income to monitor business performance.

Details

Asian Review of Accounting, vol. 16 no. 2
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 21 April 2011

Anastasios G. Malliaris and Ramaprasad Bhar

The equity premium of the S&P 500 index is explained in this paper by several variables that can be grouped into fundamental, behavioral, and macroeconomic factors. We hypothesize…

Abstract

The equity premium of the S&P 500 index is explained in this paper by several variables that can be grouped into fundamental, behavioral, and macroeconomic factors. We hypothesize that the statistical significance of these variables changes across economic regimes. The three regimes we consider are the low‐volatility, medium‐volatility, and high‐volatility regimes in contrast to previous studies that do not differentiate across economic regimes. By using the three‐state Markov switching regime econometric methodology, we confirm that the statistical significance of the independent variables representing fundamentals, macroeconomic conditions, and a behavioral variable changes across economic regimes. Our findings offer an improved understanding of what moves the equity premium across economic regimes than what we can learn from single‐equation estimation. Our results also confirm the significance of momentum as a behavioral variable across all economic regimes

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 1 April 2003

H.P. Wolmarans

It is generally accepted that the payment of dividends is the most important and most widely used instrument for the distribution of value to shareholders. Shareholders also…

Abstract

It is generally accepted that the payment of dividends is the most important and most widely used instrument for the distribution of value to shareholders. Shareholders also prefer to receive regular dividends rather than irregular cash payments. A well‐known model that attempts to explain dividend policy is that of Lintner (1956). This study investigates whether Lintner’s model can be used to explain South African dividend payments and compares this model with another, less sophisticated, model, namely the “percentage model”. Lintner’s model does not have a very good fit, probably as a result of the small sample used. Nearly half of the 200 largest companies that are listed on the Johannesburg Securities Exchange were excluded from the study as they were not listed for a sufficiently long period. Other companies were excluded on the grounds of having maintained their dividends on the same level for at least two consecutive years.

Details

Meditari Accountancy Research, vol. 11 no. 1
Type: Research Article
ISSN: 1022-2529

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