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Article
Publication date: 7 January 2014

Richard A. DeFusco, Lee M. Dunham and John Geppert

– The purpose of this paper is to examine the dynamic relationships among investment, earnings and dividends for US firms. The sample period is 1950-2006.

Abstract

Purpose

The purpose of this paper is to examine the dynamic relationships among investment, earnings and dividends for US firms. The sample period is 1950-2006.

Design/methodology/approach

The authors use a firm-level vector auto-regression (VAR) framework to examine the firm-level dynamics among investment, earnings and dividends. The firm-level VAR yields Granger causality results, impulse response functions, and variance decompositions characterizing the dynamics of these three variables at the firm level.

Findings

For the average firm in the sample, Miller and Modigliani dividend policy irrelevance is not supported, even in the long run; the shocks to dividends do have long-run consequences for investment and vice versa. Dividend changes are an ineffective signal of future earnings in both the short and long-term. The cost of an increased dividend is on average an immediate decrease of $3 in investment for every dollar increase in dividends and the effect is persistent up to six years after the increase in dividends.

Research limitations/implications

The firm-level VAR used in the study requires that sample firms have long histories of investment, earnings and dividend data. The study addresses the interaction between dividends and investment and therefore necessitates examining dividend-paying firms. By the nature of the research question, the sample firms will not be representative in all respects to the universe of firms. The most striking difference between the sample and the universe of firms is firm size. As such, the study's conclusions are most applicable to larger, stable, dividend-paying firms. The study is also limited to dividend payout. Alternative payout policies, such as share repurchases, are not considered in this work.

Practical implications

In theory, increases in dividends can signal higher future earnings; however, the evidence does not support this hypothesis. When capital markets are constrained or incomplete, increases in dividends come at a cost to investment. Firms should consider alternative methods of signaling future earnings that have less of an impact on investment. Investors should carefully evaluate the possible impact of an increase in dividends on investment and future earnings growth.

Originality/value

This study is the first to examine the dynamics of earnings, dividends and investment at a firm level and over such a long sample period. By including the dynamics of earnings, the authors emphasize the potential opportunity costs that increasing dividends has on investment when capital markets are imperfect. The dynamic system also allows the authors to consider long-run effects as well as immediate responses to system shocks.

Details

Managerial Finance, vol. 40 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 1 January 2001

E. Dockery and F. Vergari

Outlines previous research on cointegration between capital markets and assesses the degree of cointegration between liberalized Eastern European markets (the Czech…

Abstract

Outlines previous research on cointegration between capital markets and assesses the degree of cointegration between liberalized Eastern European markets (the Czech Republic, Poland and Hungary) and the German and UK markets in the context of increasing foreign investment in Eastern Europe. Uses 1991‐1995 weekly indices to examine stock returns, performing several different tests, and suggests (in contrast to previous findings) that the markets are co‐ordinated for the whol study period. Briefly considers the implications for investment portfolio diversifaction and short‐run investment strategies.

Details

Managerial Finance, vol. 27 no. 1/2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 April 2014

Fariss Terry Mousa and Jaideep Chowdhury

The slack-innovation relationship has interested scholars for years. The authors aim to delve into the impact of financial slack on firm innovation by replicating a

Abstract

Purpose

The slack-innovation relationship has interested scholars for years. The authors aim to delve into the impact of financial slack on firm innovation by replicating a classic study arguing that this relationship has an inverse U-shape.

Design/methodology/approach

The sample consists of all US firms that were publicly traded between 1993 and 2011. The authors employ the standard econometrics methodology of panel regression with firm-fixed effect and time-fixed effect to estimate the regression equation of firm innovation on financial slack.

Findings

The authors find that the relationship between financial slack and R&D investments is similar to that suggested by earlier authors, thus enhancing the generalizability of this important finding in management research. The authors also find that this relationship holds even during economic downturns.

Originality/value

The authors replicate Nohria and Gulati's classic study by considering the impact of slack on innovation. The authors also move away from survey data, as used by Nohria and Gulati. The authors utilize actual firm-level data for a large sample of US publicly traded firms from 1993 to 2011, thus enhancing the generalizability of these findings.

Details

American Journal of Business, vol. 29 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 11 September 2009

Yi Wang and Bob Clift

The purpose of this paper is to investigate the relationship between board diversity, as represented by the percentage of female, minority or female and minority directors…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between board diversity, as represented by the percentage of female, minority or female and minority directors on the boards of directors, and firm financial performance, and to explore the potential determinants of board diversity, using data from the Australian corporate sector.

Design/methodology/approach

The paper uses the top 500 Australian companies as the initial data‐set. Firm performance measures include return on assets, return on equity and shareholder return. Several control variables are introduced in the regression analysis.

Findings

The results indicate that gender and racial diversity do not have significant influence on performance. It is reported that larger firms tend to have relatively more female members, and smaller firms or firms with larger boards may have more minority directors.

Research limitations/implications

The findings should not be extrapolated to all firms as the sample is restricted to listed companies. To examine the complete impact of board diversity future research could consider non‐financial performance indicators.

Practical implications

The analysis shows that greater diversity does not lead to poor performance, which suggests that gender and racial diversity could be achieved without a negative effect on shareholder wealth.

Originality/value

In addition to giving improved evidence on the effect of gender diversity on performance, the paper may be the first study which ascertains whether there is a “business case” for greater minority participation in boardrooms in the Australian context.

Details

Pacific Accounting Review, vol. 21 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

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