Search results

This chapter analyzes how firms conduct their dividend policy around the world. In principles, firms are free to pay or not to pay dividends and choose dividend levels. However, in some countries, the government requires firms to pay dividends annually in order to protect minority shareholders. Brazil, Chile, Colombia, Greece, and Venezuela are five countries of mandatory dividend payments. In addition, using the Compustat database, we investigate how nonfinancial firms pay dividends over the period 2001–2020. The percentage of payers tends to decrease across four time periods including 2001–2005, 2006–2010, 2011–2015, and 2016–2020. Newly listed firms are less likely to distribute dividends than old firms. “Payers,” “Always payers,” and “Former payers” have positive earnings while “Nonpayers” and “Never payers” experience negative earnings. “Never payers” have the highest level of cash while “Always payers” and “Former payers” have the smallest cash reserves. Moreover, Asia-Pacific has the largest proportion of payers but it tends to decrease. America has the lowest proportion of dividend payers, but it tends to increase. Firms in developing countries are more likely to pay dividends. Both the proportion of payers and the average payout ratio of civil law countries are much higher than those of common law countries. The United States has the lowest percentage of paying firms and dividend payouts. Furthermore, construction and wholesale trade industries have the highest proportions of payers and payout ratios. Mineral and services industries are less likely to pay dividends. Tax rates for dividends and capital gains are diverse across countries.

Several studies have observed that stocks tend to drop by an amount that is less than the dividend on the ex-dividend day, the so-called ex-dividend day anomaly. However, there still remains a lack of consensus for a single explanation of this anomaly. Different from other studies, this dissertation attempts to answer the primary research question: how can investors make trading profits from the ex-dividend day anomaly and how much can they earn? With this goal, I examine the economic motivations of equity investors through four main hypotheses identified in the anomaly's literature: the tax differential hypothesis, the short-term trading hypothesis, the tick size hypothesis, and the leverage hypothesis.

While the U.S. ex-dividend anomaly is well studied, I examine a long data window (1975–2010) of Thailand data. The unique structure of the Thai stock market allows me to assess all four main hypotheses proposed in the literature simultaneously. Although I extract the sample data from two data sources, I demonstrate that the combined data are consistently sampled. I further construct three trading strategies – “daily return,” “lag one daily return,” and “weekly return” – to alleviate the potential effect of irregular data observation.

I find that the ex-dividend day anomaly exists in Thailand, is governed by the tax differential, and is driven by short-term trading activities. That is, investors trade heavily around the ex-dividend day to reap the benefits of the tax differential. I find mixed results for the predictions of the tick size hypothesis and results that are inconsistent with the predictions of the leverage hypothesis.

I conclude that, on the Stock Exchange of Thailand, juristic and foreign investors can profitably buy stocks cum-dividend and sell them ex-dividend while local investors should engage in short sale transactions. On average, investors who employ the daily return strategy have earned significant abnormal return up to 0.15% (45.66% annualized rate) and up to 0.17% (50.99% annualized rate) for the lag one daily return strategy. Investors can also make a trading profit by conducting the weekly return strategy and earn up to 0.59% (35.67% annualized rate), on average.

We analyze cumulative abnormal returns (CARs) around key events leading up to the passage of JGTRRA to determine whether a reduction in the individual tax rate on dividend income affects stock prices, and if so, whether that effect differs for different groups of firms. In general, we find that dividend yield is positive and significantly related to CARs around both the December and January announcements that legislation might be enacted to reduce or eliminate the dividend tax. Consistent with this observation, when Congress subsequently passed the final Senate vote to reduce but not eliminate dividend taxes, we observe positive and statistically significant returns for high-yield dividend firms, but not for other firms. Additionally, we analyze the role of institutional ownership in the relation between firm yield and price reaction. The incentive to buy dividend-paying stocks should not be influenced by the degree to which a firm's stock is held by institutional investors but rather by the firm's dividend yield. Our results suggest that this distinction is important – institutional ownership appears to be significant for tax changes that induce seller-initiated market reactions, but not for changes that increase buyer-initiated reactions.

This chapter presents both main arguments of dividend policy theories and their empirical evidence. According to Miller and Modigliani (1961), dividend decisions are not relevant to firm value in a perfect capital market. Nevertheless, there are several market frictions in the real world (e.g., information asymmetry, agency problems, transaction costs, firm maturity, catering incentives and taxes). Therefore, academics use them to develop theories which help them explain corporate dividend decisions. Particularly, signaling theory considers dividend payments as a signal about firms' future prospects since outside investors face information disadvantage. “Bird-in-hand” theory argues that investors prefer dividends to capital gains since the former have lower risk than the latter. Agency theory is developed from the conflict of interest between corporate managers and shareholders. Corporate managers have high incentives to restrict dividend payments. Furthermore, transaction cost theory and pecking order theory posit that firms prefer internal to external funds. This drives firms to hold more cash and pay less dividends. Life cycle theory explains dividend policy by firm maturity. Mature firms have fewer investment opportunities, and thus, they tend to pay more dividends. Catering theory states that dividend decisions are based on investors' demand. Firms pay more dividends since investors prefer dividends and assign higher value to dividend payers. Tax clientele theory argues that firms that have corporate dividend policy rely on the comparative income tax rates for dividends and capital gains. Under the tax discriminations against dividends, firms tend to restrict their dividends in order to increase their stock prices.

Shareholder dividends are “rents”: they are paid out of a producer's surplus that, in a fully competitive market, would not exist. In any market system, no one has a right to rents. Why, then, do shareholders receive dividends? Most likely, share gains have been the result of the usefulness of the share-centered ideologies in justifying a tremendous shift of corporate wealth from employees to an alliance of top managers and shareholders. This alliance now shows signs of breaking down, as the managers learn they no longer need the ideological cover. Standard accounts conceal the struggle over corporate surplus and the weakness of shareholder claims to appropriate it. Recognizing that distribution of corporate surplus is a political struggle is the first step towards a less ideologically blindered discussion of how that struggle ought to be structured.

This chapter analyzes how the internal environment determines corporate dividend decisions. First, dividend policy is influenced by strategic and financial issues. Corporate strategies are developed by top managers to achieve firms' missions, visions, and long-term goals while business strategies are designed by middle managers to maintain firms' competitive advantages. These strategies affect corporate dividend decisions through corporate performance and business operations. In addition, many financial characteristics are important determinants of dividend policy. Financial characteristics are classified into three groups, namely performance-related issues (e.g., firm profitability, free cash flow, and stock liquidity), leverage-related issues (e.g., debt ratio, asset tangibility, business risk, and firm size), and investment-related issues (e.g., investment opportunities and firm maturity). Firms with high profitability, free cash flow tends to pay more dividends. Stock liquidity may have a positive effect on dividend payments through lowering costs of equity; however, it may also have a negative effect through weakening the signaling motive. Moreover, firms with high debt ratio, low asset tangibility, high business risk, and small size face higher costs of external financing. Therefore, they have low incentives to pay dividends. When firms have more investment opportunities, they are more likely to restrict dividends and save cash for their investment projects and vice versa. Second, internal stakeholders may influence corporate dividend policy since their benefits are closely related to dividend decisions. Shareholders, directors, the chief executive officer, and employees have different characteristics, positions, and hold various proportions of shares. Therefore, they create pressures on dividend decisions to protect their wealth.

This chapter analyzes how the macro-environment determines corporate dividend decisions. First, political factors including political uncertainty, economic policy uncertainty, political corruption, and democracy may have two opposite effects on dividend decisions. For example, firms learn democratic practices to improve their corporate governance, but dividend policy may be the outcome of strong corporate governance or the substitute for poor corporate governance. Second, firms in countries of high national income, low inflation, and highly developed stock markets tend to pay more dividends. A monetary restriction (expansion) reduces (increases) dividend payments, as economic shocks like financial crises and the COVID-19 may negatively affect corporate dividend policy through higher external financial constraint, economic uncertainty, and agency costs. On the other hand, they may positively influence corporate dividend policy through agency costs of debt, shareholders' bird-in-hand motive, substitution of weak corporate governance, and signaling motive. Third, social factors including national culture, religion, and language affect dividend decisions since they govern both managers' and shareholders' views and behaviors. Fourth, firms tend to reduce their dividends when they face stronger pressure to reduce pollution, produce environment-friendly products, or follow a green policy. Finally, firms have high levels of dividends when shareholders are strongly protected by laws. However, firms tend to pay more dividends in countries of weak creditor rights since dividend payments are a substitute for poor legal protection of creditors. Furthermore, corporate dividend policy changes when tax laws change the comparative tax rates on dividends and capital gains.

The manner in which publicly traded companies’ management teams handle their firm’s free cash flows (FCF) has been an issue for many decades, because it is difficult to determine whether these management teams work for their own benefit or for that of their shareholders. Recent financial scandals have heightened mistrust of management. This mistrust, in turn, may have increased the pressure to reduce the portion of FCF left under management’s control. Boards of directors control dividend payout decisions, thus determining the portion of FCF available to corporate management. This paper examines whether the 2002 legal response to corporate financial reporting scandals, which came in the form of many new initiatives and requirements imposed by the Sarbanes–Oxley Act of 2002 (SOX) on all publicly traded firms, was relevant to dividend payouts. This question is investigated by noting that the impact of these new requirements differed among firms. Some firms had already introduced the use of independent directors and fully independent committees prior to SOX making them compulsory in 2002. This paper examines whether these “pre-adopters” experienced less change in their dividend payout policies than those firms that were forced to change the composition of their board and committees.

This investigation examines the effect on dividend payouts for listed firms attributable to the SOX and concurrent changes in stock exchange regulations that compelled increased use of independent directors and fully independent committees. To study the impact of SOX and the associated, required, changes in the composition of boards of directors for many firms, the difference-in-differences methodology is employed to overcome the endogeneity concerns that have consistently challenged prior governance studies. This was accomplished by examining the effects on dividend payouts associated with the exogenously forced addition of independent directors to the boards of publicly listed firms. The results reveal that there is a significant positive relationship between firms that were compelled by law to change their boards and increases in average changes in dividend payouts and percentage changes in dividends paid, when compared to firms that had pre-adopted the Sarbanes–Oxley corporate board composition requirements. A further exploratory analysis showed that the same significant positive relationship is detected for increases in average changes in total dollars distributed, where stock repurchase dollars are combined with dividend payouts. These findings imply that these board composition changes led to decisions that increased dividend payouts in percentage terms, as well as dividend payouts and total dollars distributed in aggregate dollar amount terms.

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial decisions affect growth of the firm, the latter must also be affected by either favorable or adverse selection. Therefore, the core objective of this chapter is to examine the determinants of each financial decision and the effects on growth of the firm under conditions of information asymmetry.

Design/Methodology/Approach: This chapter uses data for the non-financial firms listed in S&P 500. The data cover quarterly periods from 1989 to 2014. The statistical tests include linearity, fixed, and random effects and normality. The generalized method of moments estimation method is employed in order to examine the relative significance and contribution of each financial decision on growth of the firm, respectively. Standard and proposed proxies of information asymmetry are discussed.

Findings: The results conclude that there is a variation in the impact of financial variables on growth of the firm at high and low levels of information asymmetry especially regarding investment and financing decisions. A similar picture emerges in the cases of firm size and industry effects. In addition, corporate dividen d policy has a similar effect on firm growth across all asymmetric levels. These findings prove that information asymmetry plays a vital role in the relationship between corporate financial decisions and growth of the firm. Finally, the results contribute to the vast literature on the estimation of information asymmetry by demonstrating that the classical and standard proxies for information asymmetry are not consistent in terms of the ability to differentiate between favorable or adverse selection (which corresponds to low and high level of information asymmetry).

Originality/Value: This chapter contributes to the related literature in two ways. First, this chapter offers updated empirical evidence on the way that financing, investment, and dividends decisions are made under conditions of favorable and adverse selection. Other related studies deal with each decision separately. Second, the study offers new proxies for measuring information asymmetry in order to reach robust estimates of the effects of financial decisions on growth of the firm under conditions of agency problems.

Using 3,994 observations of Chinese listed firms from 1995 to 2001, we find a significantly positive correlation between state ownership and cash dividend payment, and a significantly positive relation between private ownership and stock dividend payment. In particular, we find that the relation between dividend payment level and ownership structure is nonlinear. The higher the proportion of state ownership, the higher the cash dividend rate. The higher the proportion of private ownership, the higher the stock dividend rate. We conclude that the managers of Chinese listed companies are likely to cater for the preference of different shareholders.