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Article

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.

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.

Details

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

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Article

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Article

Anastacia C. Arko, Joshua Abor, Charles K.D. Adjasi and Mohammed Amidu

– The purpose of this paper is to examine the determinants of the dividend decisions of firms in Sub-Saharan Africa (SSA).

Abstract

Purpose

The purpose of this paper is to examine the determinants of the dividend decisions of firms in Sub-Saharan Africa (SSA).

Design/methodology/approach

The paper applies a two-step estimation procedure using firm-level panel data for firms in selected SSA countries during the period from 1997 to 2007. In the first step the paper employs a probit model to estimate the parameters of the determinants of the decision to pay or not to pay dividends. In the second step the paper estimates the parameters of the dividend payout and dividend per share models by applying the generalised least squares techniques.

Findings

The results provide consistent evidence that dividend decision and its payments are influenced by firm profitability level, investment opportunity sets, taxation, leverage, institutional shareholding and risk. The results affirm the signalling, agency cost and free-cash flow theories of dividend policy.

Originality/value

The main value of this paper is identification of factors that influence dividend decisions of firms in SSA.

Details

Journal of Accounting in Emerging Economies, vol. 4 no. 1
Type: Research Article
ISSN: 2042-1168

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Article

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…

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

Abdulrahman Ali Al‐Twaijry

The purpose of this research is to identify the variables with an expected influence on dividend policy and on payout ratio in an emerging market.

Abstract

Purpose

The purpose of this research is to identify the variables with an expected influence on dividend policy and on payout ratio in an emerging market.

Design/methodology/approach

Based on the literature, eight hypotheses were developed and tested using 300 firms randomly selected from the Kuala Lumpur Stock Exchange. Additional statistical analyses were presented.

Findings

The results suggest that current dividends are affected by their pasts and their future prospects. To a lesser extent dividends were associated with net earnings. Payout ratios (POR) were not found to have a strong effect on the company's future earning growth, but had some significant negative correlation with the company's leverage. Cash per share and share book value significantly and positively affect both DPS and POR.

Practical implications

The findings of the study might be of interest to academicians and practitioners.

Originality/value

This paper explores the dividend policy and the payout ratio of listed companies in a fast‐growing market that has received inadequate research attention. The paper thus adds to the body of accounting knowledge.

Details

The Journal of Risk Finance, vol. 8 no. 4
Type: Research Article
ISSN: 1526-5943

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Article

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…

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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Book part

Sarin Anantarak

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…

Abstract

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.

Details

Research in Finance
Type: Book
ISBN: 978-1-78052-752-9

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Article

Kevin Campbell and Chijioke Ohuocha

The purpose of this paper is to examine whether stock dividend announcements create value for companies traded on the Nigerian stock market and to ascertain the nature of…

Abstract

Purpose

The purpose of this paper is to examine whether stock dividend announcements create value for companies traded on the Nigerian stock market and to ascertain the nature of the information such announcements convey.

Design/methodology/approach

A standard event study methodology, employing the market model, is applied to determine the abnormal returns both on and surrounding the stock dividend announcement date. A sample is broken down based on the timing of announcements and on the frequency with which the announcing companies' shares are traded. The authors also examine the information content of stock dividends by applying the χ2 technique to test the level of association between earnings, cash dividends and stock dividends.

Findings

The findings suggest that companies that choose their own announcement date outside the Nigerian stock exchange announcement window experience positive abnormal returns if their stock is more frequently traded and negative abnormal returns if their stock is less frequently traded. In addition, support is found for both the cash substitution hypothesis and the signalling hypothesis as explanations for the information stock dividends convey to shareholders.

Research limitations/implications

The small number of companies in the “early announcement” group may not permit a definitive view to be established about the stock market reaction to early stock dividend announcements for this group of companies.

Practical implications

The findings are of practical relevance to researchers, practitioners and investors interested in companies listed on the Nigerian stock market as they reveal the extent to which the shares reflect fundamental information from corporate announcements.

Originality/value

This paper adds to the very limited academic research on the stock market reaction to stock dividend announcements in Nigeria.

Details

Managerial Finance, vol. 37 no. 3
Type: Research Article
ISSN: 0307-4358

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Article

A.A. Lonie, G. Abeyratna, D.M. Power and C.D. Sinclair

Investigates the stock market response to interactive dividend and earnings announcements by a sample of 620 UK companies over the period January to June 1991. First…

Abstract

Investigates the stock market response to interactive dividend and earnings announcements by a sample of 620 UK companies over the period January to June 1991. First, examines the possibility that the response to a dividend announcement may be influenced by whether the dividend is being increased, decreased or left unchanged. US studies suggest that this may indeed be the case and acknowledge the role of the dividend as a signal to investors; dividend increases tend to be associated with positive abnormal returns, and dividend decreases tend to be associated with negative abnormal returns around the time of the dividend announcement. Second, recognizes that identifying a unique dividend information announcement effect is particularly difficult in the UK because UK dividends are almost invariably announced simultaneously with information about corporate earnings. Addresses this problem by focusing on those occasions when the signals associated with these announcements conflict with one another ‐ where dividends are increased and earnings decrease or vice versa. The influence of combinations of dividend and earnings news is found to be important in explaining the share price reaction on the announcement day.

Details

Journal of Economic Studies, vol. 23 no. 1
Type: Research Article
ISSN: 0144-3585

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Article

Basil Al-Najjar and Erhan Kilincarslan

The purpose of this paper is to investigate the impact of regulations, reforms and legal environment on dividend policy in a different institutional setting. Particularly…

Abstract

Purpose

The purpose of this paper is to investigate the impact of regulations, reforms and legal environment on dividend policy in a different institutional setting. Particularly, it examines the firm-level cash dividend behaviour of publicly listed firms in Turkey in the post-2003 period, since there were major economic and structural reforms as well as significant regulatory changes of dividend payout rules imposed by the supervisory bodies.

Design/methodology/approach

The paper focuses on a recent large panel data set of 264 Istanbul Stock Exchange (ISE)-listed firms over a ten-year period 2003-2012. First, it employs a modified specification of Lintner’s (1956) partial adjustment model for analysis regarding target payout ratio and dividend smoothing. Second, it performs a logit model for analysis in identifying the link between financial characteristics and the likelihood of paying dividends.

Findings

The results show that ISE firms now follow the same determinants as suggested by Lintner. They, indeed, have long-term payout ratios and adjust their cash dividends by a moderate level of smoothing, and therefore adopt stable dividend policies (although less stable policies compared to their counterparts in the developed US market) as a signalling mechanism over the period 2003-2012. Moreover, the results also report that ownership structure concentration affects the target payout ratio and dividend smoothing in the Turkish market. In addition, the results further show that more profitable, more mature and larger sized ISE firms are more likely to pay cash dividends, whereas ISE firms with higher investment opportunities and more debt are less likely to distribute cash dividends in the post-2003 period.

Originality/value

To the best of authors’ knowledge, this paper is the first major research that examines the implications of reforms and regulations on cash dividend payments and dividend smoothing over time in Turkey during its market integration process in the post-2003 period.

Details

International Journal of Managerial Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1743-9132

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