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Surprise! Higher Dividends = Higher Earnings Growth

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Abstract

We investigate whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low. This relationship is not subsumed by other factors, such as simple mean reversion in earnings. Our evidence thus contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth. Rather, it is consistent with anecdotal tales about managers signaling their earnings expectations through dividends or engaging, at times, in inefficient empire building. Our findings offer a challenge to market observers who see the low dividend payouts of recent times as a sign of strong future earnings to come.

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... . ‫باح‬ ‫لألر‬ ‫توقعاتهم‬ ‫اجعة‬ ‫بمر‬ ‫يقومون‬ ‫المالين‬ ‫المحللين‬ ‫أن‬ ‫كما‬ ‫يعات‬ ‫التوز‬ ‫في‬ ‫المتوقعة‬ ‫غير‬ ‫ات‬ ‫للتغير‬ ‫استجابة‬ ‫السنوية‬ (Carroll, 1995 (Watts, 1973 Nissim and Ziv (2001), Arnott and Asness (2003), Zhou and Ruland (2006), Vivian (2006), Al-Shattarat et al. (2018), Chen and Koshoev (2018) (Myers, 1984;Gul, 1999) . (Nissim and Ziv (2001), Arnott and Asness (2003), Hanlon et al., (2006), Wann and Long (2009) ...
... . ‫باح‬ ‫لألر‬ ‫توقعاتهم‬ ‫اجعة‬ ‫بمر‬ ‫يقومون‬ ‫المالين‬ ‫المحللين‬ ‫أن‬ ‫كما‬ ‫يعات‬ ‫التوز‬ ‫في‬ ‫المتوقعة‬ ‫غير‬ ‫ات‬ ‫للتغير‬ ‫استجابة‬ ‫السنوية‬ (Carroll, 1995 (Watts, 1973 Nissim and Ziv (2001), Arnott and Asness (2003), Zhou and Ruland (2006), Vivian (2006), Al-Shattarat et al. (2018), Chen and Koshoev (2018) (Myers, 1984;Gul, 1999) . (Nissim and Ziv (2001), Arnott and Asness (2003), Hanlon et al., (2006), Wann and Long (2009) ...
... ‫مختلفة‬ ‫مالية‬ ‫اق‬ ‫أسو‬ ‫في‬ ‫اءها‬ ‫إجر‬ ‫تم‬ ‫التي‬ ‫األبحاث‬ ‫من‬ ‫العديد‬ ‫فإن‬ ، ‫السن‬ ‫خالل‬ ‫االعتقاد‬ ‫هذا‬ ‫عكس‬ ‫تثبت‬ ‫ة‬ ‫األخير‬ ‫ات‬ ‫و‬ (Willows et al., 2020) ‫بعض‬ ‫تشير‬ ‫حيث‬ ، ‫في‬ ‫تفعة‬ ‫مر‬ ‫نمو‬ ‫معدالت‬ ‫تحقق‬ ‫ما‬ ‫عادة‬ ‫تفعة‬ ‫المر‬ ‫يعات‬ ‫التوز‬ ‫ذات‬ ‫الشركات‬ ‫أن‬ ‫يبية‬ ‫التجر‬ ‫النتائج‬ ‫المستقبلية‬ ‫باح‬ ‫األر‬ (Zhou and Ruland, 2006) ‫وجد‬ ‫حيث‬ ، Healy and Palepu (1988) ‫بي‬ ‫إيجابية‬ ‫عالقة‬ ‫هناك‬ ‫أن‬ ‫أن‬ ‫على‬ ‫دليل‬ ‫هذا‬ ‫أن‬ ‫و‬ ‫باح‬ ‫األر‬ ‫في‬ ‫الالحقة‬ ‫ات‬ ‫التغير‬ ‫و‬ ‫يعات‬ ‫التوز‬ ‫ن‬ ‫لدى‬ ‫توقعات‬ ‫وجود‬ ‫على‬ ‫ة‬ ‫إشار‬ ‫أنها‬ ‫على‬ ‫يعات‬ ‫التوز‬ ‫في‬ ‫الطبيعية‬ ‫غير‬ ‫ات‬ ‫التغيير‬ ‫يعاملون‬ ‫ين‬ ‫المستثمر‬ ‫تباط‬ ‫ار‬ ‫هناك‬ ‫أن‬ ‫إلى‬ ‫الحديثة‬ ‫اسات‬ ‫الدر‬ ‫من‬ ‫العديد‬ ‫توصلت‬ ‫كما‬ ‫المستقبلية،‬ ‫باح‬ ‫األر‬ ‫بتغير‬ ‫ين‬ ‫المدير‬ ‫نسب‬ ‫بين‬ ‫إيجابي‬ ‫المستقبلية‬ ‫باح‬ ‫األر‬ ‫ونمو‬ ‫يعات‬ ‫التوز‬(Arnott and Asness, (2003), ApGwilym et al., (2006) andZhou and Ruland, (2006)) ‫تخفض‬ ‫أن‬ ‫يفترض‬ ‫حيث‬ ، ‫مالئمة‬ ‫بيئة‬ ‫ايجاد‬ ‫في‬ ‫يسهم‬ ‫مما‬ ‫المفرط‬ ‫االستثمار‬ ‫من‬ ‫الحد‬ ‫و‬ ‫الوكالة‬ ‫تكاليف‬ ‫من‬ ‫النقدية‬ ‫يعات‬ ‫التوز‬ ‫المستقبلية‬ ‫باح‬ ‫األر‬ ‫لنمو‬ (Zhou and Ruland, 2006) ‫باح‬ ‫األر‬ ‫يعات‬ ‫توز‬ ‫نسبة‬ ‫يادة‬ ‫ز‬ ‫أن‬ ‫كما‬ . ‫ة‬ ‫اإلدار‬ ‫في‬ ‫الثقة‬ ‫يادة‬ ‫ز‬ ‫إلى‬ ‫يؤدي‬ ‫يعات‬ ‫التوز‬ ‫يادة‬ ‫ز‬ ‫أن‬ ‫حيث‬ ‫المستقبلية‬ ‫باح‬ ‫األر‬ ‫نمو‬ ‫على‬ ‫ا‬ ‫ايجابي‬ ‫تؤثر‬ ‫أنه‬ ‫كما‬ ‫ا‬ ‫فضال‬ ‫هذا‬ ‫الوكالة،‬ ‫مشاكل‬ ‫من‬ ‫وتخفض‬ ‫الشركة‬ ‫أداء‬ ‫بشأن‬ ‫السلبية‬ ‫التوقعات‬ ‫من‬ ‫تحد‬ ‫عن‬ ‫مؤشر‬ ‫تعطى‬ ‫يعات‬ ‫التوز‬ ‫يادة‬ ‫ز‬ ‫أن‬ ‫مصادر‬ ‫وخاصة‬ ‫المتاحة‬ ‫ارد‬ ‫المو‬ ‫استغالل‬ ‫في‬ ‫ة‬ ‫اإلدار‬ ‫كفاءة‬ ‫عن‬ ‫الخارجية‬ ‫التمويل‬ (Prasangi and Wijesinghe., 2016) ‫يعات‬ ‫للتوز‬ ‫ة‬ ‫اإلشار‬ ‫نماذج‬ ‫تشير‬ ‫كما‬ . ...
... The sustainable growth rate assumes the dividend payout ratio will remain constant and uses return on equity, an accounting ratio, to estimate cash flow growth (Higgins, 1977). There is ample research which suggests the claims of the sustainable growth rate are false (Arnott & Asness, 2003;DeAngelo & Skinner, 1996;Vermeulen & Smit, 2011;Zhou & Ruland, 2006) but there is limited research which investigates other variables and their effect on earnings growth. ...
... Previous literature has focused on the sustainable growth model and whether the relationship between dividend payout ratio and growth holds (Arnott & Asness, 2003;Zhou & Ruland, 2006;Vermeulen & Smit, 2011). The focus of research on earnings growth has, therefore, been largely influenced by the information content of dividends. ...
... The current research builds on these earlier studies by considering if real GDP also influences earnings growth. Due to the emphasis placed on divided-payout in the prior research (Arnott & Asness, 2003;Zhou & Ruland, 2006;Vermeulen & Smit, 2011), this variable is included with GDP as possible predictors of growth in the final model. ...
Article
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The estimation of firm growth is increasingly relevant to providers of capital in periods of economic uncertainty. The current study employs univariate and multivariate analyses to assess the impact of real GDP and the dividend payout ratio on earnings growth of JSE-listed firms. The findings reveal that there is no relationship between these hypothesised predictors of earnings growth, despite contrasting results of previous studies. Through the inclusion of real GDP in models that are established in the research, the study contributes to the literature of macroeconomic variables as lead indicators of firms’ earnings growth potential. This research also extends prior research on the impact of dividend payout ratio on future earnings growth.
... One of them is the use of the dividends as the signaling tool of management's optimistic visions on the …rm's future performance (Bhattacharya, 1979;John and Williams, 1985). This motivation …nds support from the literature which suggests that dividend payout ratios have a positive association with future earnings growth (Ap Gwilym et al., 2006;Arnott and Asness, 2003). Zhou and Ruland (2006) revealed that this phenomenon remains constant even under a situation of total dividends. ...
... Contemporary scholars (Arnott and Asness, 2003;Huang et al., 2009;Zhou and Ruland, 2006) have established that dividend payouts are positively associated with the future earnings growth. Those …ndings are totally opposite to the earlier …ndings (Gordon, 1962;Gul, 1999;Myers, 1984) which suggest that dividend payouts decrease the funds for future reinvestments and that they are detrimental to the future earnings growth. ...
... Model 2 -signi…cant and positive coe¢ cient of Payout is consistent with the expectations and previous …ndings which assert that dividend payout is positively associated with the future earnings growth (Arnott and Asness, 2003;Huang et al., 2009;Zhou and Ruland, 2006). This was not a case for the …rms before the cross-listing. ...
Article
Using a sample of rapidly developing "Four Tigers" (i.e. Hong Kong, Singapore, South Korea, and Taiwan), this paper investigates the influence of the cross-listing effect and the payout policy on firm performance and valuation. While the payout policy does not significantly affect abnormal returns for both cross-listed and non-cross-listed companies, the payout policy of cross-listed firms is positively correlated with earnings growth. Further investigation reveals that the companies with higher investment opportunities, represented by Tobin's Q, get a positive reaction by foreign investors when they signal about future prospects by paying out more cash dividends. Interestingly, domestic investors do not share the same opinion and prefer the firms to accumulate the funds for the execution of future investment projects instead of dividend distribution. The results provide evidence that the firms with investment opportunities in combination with positive payouts better stimulate earnings growth if they are cross-listed.
... In this study we will be estimating the relationship of the size of the firm and leverage and dividend payments of the Pakistani banking industry and will check effect of a new variable earning per share on dividend policy along with the other discussed variables. The literature also supports the argument (Arnott, 2003) (Ruland, 2006) (Attiya, 2009). ...
... Moreover, recent studies show good deal of work is done over the individual factors affecting the dividend policy of the firm. As per (Arnott, 2003) the dividend payout fuels the earnings per share growth of the firm. According to (Javid, 2008) Pakistani firms rely on current earnings per share and past dividends while devising the dividend policy. ...
... However, there are contradictions in the researcher's findings where some of the studies disagree with them. For example (Arnott, 2003) holds that the lower payout ratio precedes the lower future earnings. It is observed that the retained earnings are invested into the less efficient projects with lower growth whereas higher dividend payout leads to the finance the carefully selected projects. ...
Article
Full-text available
The research investigates impact of firm specific factors on dividend payout of the 13 conventional and Islamic banks listed on Pakistani Stock Exchange for the period from 2001 to 2016. We have taken Lintner (1956) Model and its extended forms as a base model for our research analysis. We have checked the predict power of the independent variables i.e. earnings per share, return on assets, return on equity and debt to equity ratio on depended variable dividend payout ratio. Quantitative data was collected annually over the stated period. In this study we have estimated the panel data taken from Thomson Reuters on EVIEWS by running Fixed Effect Model (FEM). The research approach is epistemological and we have taken post positivism as our research paradigm. Before running the analysis, the data was checked for the normality, autocorrelation, heteroskedasticity, and multicollinearity. We found that earning per share have positive correlation with the dividend payout ratio, whereas return on assets and debt to equity ratio have also strong linear association with the dividend payout. However the dividends paid by the banks are found to be more sensitive to the earnings per share. In contrast our results show an inverse linear association of the return on equity with the dividend payout. Our results are consistent with the existing literature that the banks that pay more dividends are more profitable than the banks that do not pay at all. The research will be beneficial for the stock market investors and academic scholars to study and predict the dividend payout behavior of the listed banks of Pakistan.
... The conventional `market' view is that higher retained earnings would lead to the exploitation of more positive NPV capital projects and subsequent higher earnings by companies. However, Arnott and Asness (2003) found no evidence to support this view using US data from 1871 to 2001. Indeed the reverse was true with low payout ratios being positively correlated with low subsequent 1 0-year real earnings growth. ...
... The approach used in this study is very similar to that adopted by Arnott and Asness (2003) so that direct comparisons can be drawn between the US and UK evidence. An index is chosen to represent the aggregate UK market. ...
... Furthermore, rebalancing occurs as stocks are acquired and new listings enter the market. Arnott and Asness (2003) suggest that as larger and more profitable firms replace those firms ejected from the index it leads to an increase in the divisor of the index. This divisor also applies to the total earnings of the index and thus the earnings per share is also revised downwards. ...
Thesis
p> The aim of this thesis is to investigate a number of different aspects of the dividend policy imposed by firms in the United Kingdom and the implications for shareholders. Dividends, and in particular dividend reinvestment, have previously been shown to have contributed significantly to long-term equity returns with capital gains representing a relatively small component. Recent evidence, however, from the United States has pointed to a considerable decline in the proportion of firms paying dividends. This has implications for investors that require a history of dividend payments and thus who are now constrained in a smaller portion of the equity market. This thesis reports that whilst there has been a decline in the percentage of firms making payments in the UK , this has been relatively modest compared to the US . Furthermore, the total market payment has increased in real terms as a concentration of dividends has occurred amongst the largest payers. The aggregate dividend payout ratio is also considered as a stand-alone investment tool. Contrary to conventional wisdom, it is reported that a positive relationship exists between the payout ratio and future real earnings growth. The remainder of the thesis studies factors that influence the dividend policy of individual firms and whether managers use this as a means of addressing informational asymmetries by signalling their expectations to investors. It is found that the major factor in dividend setting is profitability, however, there is ‘stickiness’ observed that leads to current dividends being influenced by past payments. There is only limited evidence presented of dividends conveying information regarding the future profitability of firms. </p
... That is, some studies linked dividends payout and lower FCFs to positive issues such as better earnings growth in the future (see Brav et al., 2005;Lee, 2010;Skinner and Soltes, 2011). For example, Arnott and Asness (2003) showed that higher levels of dividends payout are related to efficient projects and improvement in US future profit results. Brav et al. (2005) found that the stability of future earnings is connected to the dividends payout policy. ...
... It also supports the argument that dividends payout can provide insights into future permanent earnings (Ham's et al., 2020). Finally, it supports studies that linked dividends to the projections of future earnings, such as Arnott and Asness (2003) in the USA context and Al-Dhamari and Ismail (2014) in the Malaysian context. However, it is different from other studies showing that increases in dividends do not convoy information regarding future earnings (e.g., Grullon et al., 2005). ...
... The present findings also support the arguments that dividends payout can provide insights into future permanent earnings (Ham et al.., 2020). Finally, it supports studies that linked dividends to the projections of future earnings (e.g., Arnott and Asness, 2003;Al-Dhamari and Ismail, 2014). However, it is different from other studies that do not see dividends convoying valuable information about corporate future earnings (e.g., Benartzi et al., 1997;Grullon et al., 2005). ...
Article
Full-text available
This study investigates the relation between dividends payout and earnings predictability of firms listed on the Egyptian Stock Exchange as an emerging African market. We depend on a sample of firms listed on the Egyptian stock exchange (EGX100) during 2014-2018. To test the hypotheses, we use two independent sample t-test and OLS regression. The principal analysis revealed that dividends payout improves the ability of current earnings to forecast firms’ future earnings. Results also indicated that dividends payout could enhance the ability of current earnings to forecast one year-ahead cash flow. To the best of our knowledge, this is the first study that examines the implications of dividends payout on earnings predictability in the Egyptian market. The findings present new insights to investors, researchers, and regulators concerned with agency conflicts of interest within the firm. It also presents evidence on the potential alternative mechanisms for decreasing agency costs in African emerging markets. Received: 8 April 2022 / Accepted: 4 August 2022 / Published: 2 September 2022
... Robust statistical analysis is employed which controls for possible confounding variables such as company size, return on assets, earnings yield, leverage, past earnings growth and asset growth. Lastly, testing focuses on several investment horizons over one-year, three-year, five-year and seven-year subsequent earnings growth periods to counter the possible lagged effect of retained earnings (Arnott and Asness, 2003;Vermeulen and Smit, 2011;Zhou and Ruland, 2006). ...
... As dividend policy is a function of a company's decision to retain profits or distribute them, the determinants of these financial decisions are of interest to financial managers (Kajola et al., 2015b). The Gordon growth model is a model used to calculate the intrinsic value of shares by present valuing the future dividends (Gordon, 1963).With the assumption that the expected returns of a company are not changed with a change in the company's dividend policy, this equation shows that any change in the level of dividends paid by the company would lead to a change in the share price of the company or the expected future earnings levels, and hence growth in the form of a change in the price/earnings ratio (Arnott and Asness, 2003). More specifically, an increase in the level of dividend payout must lead to either an increase in the share price or a decrease in the growth factor (future growth) if the expected return is constant. ...
... Because of this information asymmetry between management and other stakeholders, dividends are often used as a signalling tool. Arnott and Asness (2003) pioneered this subject by considering ten-year and five-year earnings growth of companies in the US. The results showed that future earnings growth was fastest when the dividend payout ratio was high. ...
... This indicates that companies with high growth rates will have low dividends, and high retained earnings. In contrast to the results of previous studies, namely research conducted by Arnott and Asness (2003) [4] and [2]who investigated the relationship between dividend payout and future earnings growth which is contrary to conventional wisdom(former market observers). Both studies have found that high earnings growth is correlated with higher dividend rates rather than low dividend, which means that current dividend payouts have a correlation that is directly proportional to future earnings of the company. ...
... This indicates that companies with high growth rates will have low dividends, and high retained earnings. In contrast to the results of previous studies, namely research conducted by Arnott and Asness (2003) [4] and [2]who investigated the relationship between dividend payout and future earnings growth which is contrary to conventional wisdom(former market observers). Both studies have found that high earnings growth is correlated with higher dividend rates rather than low dividend, which means that current dividend payouts have a correlation that is directly proportional to future earnings of the company. ...
Article
Full-text available
The purpose of this paper is to examine the relation between Dividend Payout, Firm Size, ROA, Leverage, Earnings yield, Past Earnings Growth and Annual Growth in Total Assets towards Future Earnings Growth when the periode in one, three, and five years ahead. The study sample was taken from non-financial firms that listed on the Indonesia Stock Exchange in the period 2002-2016. The research method used in this research was multivariate regression. The proxy used for variable dividend payout is dividend payout ratio and proxy used for variable earnings growth is compounded annual earnings per share. The result show that high dividends signal high earnings growth, so that the study weakens the point of view of previous market observers who argue that dividend has negative relations to future earnings growth. The results of this study can help investors in considering options in choosing companies to invest by choosing companies who have high dividends. Keywords - Dividend Payout; Size; Future Earnings Growth; Past Earnings Growth
... A study by Zhou & Ruland (2006) revealed that high dividend pay-out firms tend to experience strong future earnings but relatively low past earnings growth. The findings of another study done by Arnott & Asness (2003) also revealed that future earnings growth is associated with high rather than low dividend pay-out. They concluded that historical evidence strongly suggests that expected future earnings growth is fastest when current pay-out ratios are high and slowest when pay-out ratios are low. ...
... This is prominent for firms with limited growth opportunities or a tendency towards over-investment. Paying substantial dividends which in turn would require managers to raise funds from issuance of shares, may subject management to more scrutiny, reduce conflicts of interest and thus curtail suboptimal investment (Arnott & Asness, 2003). This is based on the assumption that suboptimal investments lay the foundation for poor earnings growth in the future whereas discipline and a minimization of conflicts will enhance growth of future earnings through carefully chosen projects. ...
Article
The broad objective of this study is to empirically examine dividend policy as determinants of firm value of listed companies in Nigeria by employing apanel data of ten (10) year, from 2010 to 2019 time frame. To achieve this objective, we employed one notable measure of firm value (market to book ratio) and selected specific proxies of dividend policy which have been employed in related prior literature. To this end, we hypothesized that dividend policy measures which include; dividend yield, dividend per share and dividend pay-out ratio are no significant determinants of firm value across listed non-financial firms during the period under investigation in Nigeria. Robust least square regression analysis was employed to test the formulated hypotheses. Results obtained from the descriptive statistics revealed that dividend pay-out is an insignificant determinant of market to book value shown as; DIVPAY (Coef. =-0.0001, t =-0.34 and P-value = 0.737). Again, dividend per share has a significant positive influence on market to shown as; DIPS (Coef. = 0.7692, t = 61.98 and P-value = 0.000). More so, dividend yield has a significant (1%) negative effect on market to book value shown as; DIYD (Coef. =-0.0500, t =-5.63 and P-value = 0.000). From the findings, we conclude that dividend yield and dividend per share are determinants of firm value. However, dividend pay-out ratio is not a significant determinant of firm value in Nigeria. It is recommended that management should concert policies and efforts which will reduce profits share to investors and redirect those funds as retained earnings for the purpose of growing the company.
... Subsequently, it found negative association between company's market value and both dividends and initiation announcement returns. Conversely, lower dividends may result in lower growth and market value due to suboptimal investment decisions by managers (Arnott and Asness, 2003). ...
... Hence, Arnott and Asness (2003) suggest that an optimal investment and/or dividend decisions by management should increase company's market value. ...
Thesis
Full-text available
The empirical literature on the determinants of the disclosure of forward looking information (FLD) offers mixed results. This hinders stakeholders’ understanding of the factors affecting companies’ decision to report FLD in the annual report narratives. Nonetheless, FLD is intended to capture prospective performance information. However, the boilerplate, storytelling, bias, and the auditing nature of FLD could impair its value relevance. Therefore, this research aims to identify the main determinants of FLD and its value relevance using an automated content analysis technique for the measure of FLD. The research employs a sample of narrative sections extracted from annual reports of 40 Egyptian listed companies for a nine year time-period (2008 -2016). The final sample comprised 360 observations of annual reports and two empirical regression models are used. FLD is measured by the number of sentences coded as containing both forwardlooking and financial Egyptian keywords. Value relevance of FLD is measured by Tobin’s Q. The study finds that FLD is positively associated with company size, leverage, market risk, and industry type in terms of company characteristics and with auditor type in terms of governance characteristics. However, it is negatively associated with company’s dividend policy and competitiveness level. This result adds to the validity of the FLD measure but suggests the need for more enhancements in the Egyptian governance structure to promote FLD publishing. The study also finds that FLD has market value relevance. This suggests that the disclosure of forward looking financial information should complement financial statements in Egypt. This also implies that managers and regulators should consider more the economic consequences of FLD and act on conveying transparent and prospective information in an understandable and readable format for the stakeholders. This research contributes to the accounting literature related to the using of automated content analysis for investigating the characteristics of narrative disclosure, particularly for an Arabic content using common English software. This research also contributes to value relevance of narrative disclosure in an emerging country; Egypt. The results also enrich agency, signalling, stakeholders, cost of disclosures and dividend theories.
... Here dividends payment is discouraged since it contributes to cheap internal sources of finance compared to issuing equity or even borrowing to finance expansion. It therefore suggests that firms that pay high dividends experience low growth which contradicts studies by Zhou and Ruland (2006) and Arnott and Asness (2003). The equity component of a firm increases when more earnings are retained. ...
... This applies to companies initiating, maintaining or increasing dividends. Studies particularly of public companies with a history of paying cash dividends are observed to be reluctant to omit (Arnott & Asness, 2003) or reduce payout probably because investors only get information about future prospects of the company from dividends distributed. ...
... The essential condition for the dividend payout is the company's profits. Profitability is thus considered as the most influential factor of the firm's capacity to declare and pay dividends [Abor, Bokpin, 2010;Arnott, Asness 2003]. Thus according to different research, return on assets is negatively correlated with the dividend yield. ...
... The authors find that dividend payout ratios have a predictive power in the case of profitability, but its effect is not so strong as the DIV pattern and productivity of the company. The positive relationship of this factor confirms the findings of Chen and Steiner [1999], Arnott et al. [2003], Abor and Bokpin [2010], Møller and Sander [2017], and Franc-Dąbrowska et al. [2019]. ...
... The statement was also proven by Allen & Michaely (1995), that the dividend policy is influenced by the capital of the company. Arnott & Asness (2003) observed the prospect of future dividend payout ratios by examining the company's income 10 years earlier. The results prove that the previous year's income encourages companies to increase their revenue, companies will pay more when they know the bright prospects of their future earnings are bright and less when the prospect of dim earnings (Arnott & Asness, 2003). ...
... Arnott & Asness (2003) observed the prospect of future dividend payout ratios by examining the company's income 10 years earlier. The results prove that the previous year's income encourages companies to increase their revenue, companies will pay more when they know the bright prospects of their future earnings are bright and less when the prospect of dim earnings (Arnott & Asness, 2003). Similar results were also conveyed by Kighir, Omar, & Mohamed (2015), that the main determinants of changes in dividend payment policies were cash flow and earnings. ...
Article
Full-text available
Objective: This study examines the effect of earnings and corporate taxes role on the company's dividend policy in the SRI-KEHATI Index. In this research, dividend policy means dividends paid proportion to shareholders. Earnings are estimated by four financial ratios namely contributed capital ratio, prior year-earnings, sales growth, and return on assets.Research Design & Methods: The sample is taken according to purposive sampling with the criteria of the consistency of the company listed in the SRI-KEHATI Index during 2014-2017 and routinely distributes annual dividends, finally 14 companies are taken from 33 companies. Panel data were examined with the assistance of Eviews 9.0 software. Data collected from the company's financial statements and measured using a formula adopted from earlier research. Findings: Empirical results found that capital ratio, prior year-earnings, sales growth, and corporate taxes did not significantly affect the dividend payout ratio. While return on assets has a positive effect on dividend payout ratio. Companies that grow well will need more funds to cover their financing and try to keep up their income proportion, one way is to pay a constant dividend, lower, or even zero dividends. Limitations & Recommendations: This finding recommends that investors should pay attention to company profitability by measuring return on assets. Future research can use the new stock index’s constituents such as IDX High Dividend 20 and include other factors that indicated to determine dividend policy. Contribution & Value Added: This result contributes to the financial literature, especially related to the dividend policy of public listed companies in Indonesia. Practically, investors can use this result as additional information in investment decisions.
... In this support, Farrukh, et al. [143] found a positive linkage between dividend policy and firm performance in Pakistan. Various studies suggested the positive connection between dividend payment and firm performance [144,145]. ...
... For the Pakistani market, Javeed and Lefen [24] supported the role of CSR for firm performance. Furthermore, multiple scholars have provided evidence for the positive association between CSR and firm performance [48,144]. Stakeholder theory supported these results as CSR is an imperative means to improve shareholder wealth and motivate more stakeholders for social actions [15]. ...
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At present, climate and other environmental problems are arising because of the development of the industrial sector at a large level. The industrial sector is supposed to be a major cause of climate change problems that lead to global warming. Therefore, corporate social responsibility (CSR) with the help of corporate governance is an imperative approach to control these social problems. Consequently, in the context of the organizational and management theory, agency theory, and the stakeholder theory, this study focuses on important factors of internal corporate governance such as chief executive officer (CEO) power, the board size, independence, ownership concentration , managerial ownership, and audit quality for improving the profitability of firms. Moreover, this study considers corporate social responsibility as a controlling and moderating factor for firm performance and internal corporate governance. We employed ordinary least square (OLS) for en-dogeneity testing, fixed effect (FE), generalized method of moments (GMM), and feasible generalized least square (FGLS) on data of Pakistani firms for the period of 2010-2019. The results of this study demonstrate the following outcomes: firstly, all internal corporate governance factors are positively linked with firm performance; secondly, corporate social responsibility (CSR) is the most valuable tool for improving profitability. Importantly, this study suggests that all internal corporate governance factors are positively linked with firm performance because of the interactive role of corporate social responsibility (CSR). This study practically contributes to the literature by suggesting the imperative role of corporate social responsibility (CSR) for internal corporate governance, which may help to reduce climate and social problems.
... George and Kumudha (2006) used Lintner's model and indicated that current year's dividend per share is positively related to current years earning per share and previous year dividend per share (lagged dividend). Arnott and Asness (2003) studied the US stock markets (S&P500) and found that higher aggregate dividend payout ratios associated with higher future earnings growth. Both Zhou and Ruland (2006) and Gwilym et al. (2006) supported the findings of Arnot and Asness. ...
... As corporações buscam mais que indicadores de resultados, buscam repensar seus processos e investimentos com maior responsabilidade e transparência junto aos stakeholders, assim como uma melhor remuneração aos (Arnott;Asness, 2003, p. 70-87). Desta forma, a adoção dos princípios de Governança Corporativa e o Compliance tornam-se essenciais em empresas que exercem as melhores práticas de mercado (Doidge et al 2007). ...
Article
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A área de Compliance é muito importante, principalmente para Instituições Financeiras, sendo responsável por instituir controles, regras, procedimentos preventivos em atendimento aos regulamentos e legislações nacionais e internacionais. Essa área representa uma extensão nas Instituições, em atendimento a legislação de prevenção à lavagem de dinheiro (monitoramento das movimentações financeiras), e tem forte importância como pilar de Governança Corporativa. Baseado na experiência de 13 anos, na estruturação das responsabilidades de uma área de Compliance, por meio de participação direta em uma Instituição Financeira, o objetivo desse relato técnico é descrever de forma aplicada a evolução da área de Compliance, sua importância, sua abrangência, as contribuições da existência de adequada estrutura às necessidades da Instituição e do mercado e as consequências de não ter a área. Tudo o que é relatado confirma que organizações necessariamente precisam buscar o compliance, como meio de fortalecer sua posição no mercado, e encarar a ética não só como uma forma de ação conveniente. Após anos de experiência na área, desenvolvendo-a e estruturando-a, conclui-se que compliance é um braço dos Órgãos Reguladores junto a Administração, no que se refere à segurança, respeito à normas e controles e à busca da conformidade por meio da ética.
... Fidrmuc and Jacob 2010, Jiang et al 2017, Ye et al. 2019), other -legal (legal system, mandatory dividends, tax advantages, etc., as in La Porta et al. 2000, Fidrmuc and Jacob 2010, Ye et al. 2019, etc.), cultural (individualism, power distance, uncertainty avoidance, 5 in Fidrmuc and Jacob 2010), related to ownership structure (Jiang et al 2017, Ye et al. 2019), board gender diversity(Chen et al. 2017, Ye et al. 2019, etc. DPR is also used as independent variable in some studies (e.g.,Lintner 1956, Lamont 1998, Lettau and Ludvigson 2001, Arnott and Asness 2003, Cincotti et al 2010, Baker et al. 2012, He et al. 2017, Chen and Desiderio 2018. ...
Article
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Abstract. Dividend policy is still a largely discussed issue in corporate finance literature. One of the main indicators used in analysing the dividend policy is the dividend payout ratio. Using a database consisting of 12,085 companies operating in 73 countries, for the period 2008–2014, the authors found that the dividend payout ratio follows a Tweedie distribution, and not a normal one. This distribution is stable over time for the entire analysed period. In addition, it describes the case of almost all the countries included in the sample. Thus, a better estimation of the probability that dividend payout ratio is lower or higher than a benchmark can be provided. Also, an analysis of dividend policy, distinctly considering payer versus non-payer companies, can offer additional important information for both practitioners and academics. JEL Codes: G35, C01, C51, C55 Keywords: Dividend policy; dividend payout ratio; Tweedie distribution
... Whereas, high payout ratio may considered as sign of financial distress especially, when attempts are made to maintain dividend (Gwilym et al, 2005). In contrast, Arnott and Asness (2003) reported that high dividend payout ratio historically associated with high growth of earnings. Fama and French (2002) argued that those firms who never pay dividends are regarded companies with a high growth and investment opportunities. ...
Conference Paper
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In line with strategic importance of corporate investment decisions, the extant literature has signified the importance of understanding whether and how institutional settings alongwith firm and country level environment influence the investment behavior of firms. This study warranted the need to understand how distinctive nature of sectors explains the investment decisions across developed and developing markets. The seminal attempt is made to append body of existing knowledge by observing the corroborated impact of sector level factors (munificence, dynamism and level of industry concentration) in line with firm and macroeconomic environment on firms' corporate investment decisions. Based on samples of US and Pakistani Textile Sector firms for period of 9 years from 2006-2015, the study employed Customized Econometric Estimator (Nested Testing Model). The findings validate the significance of sectors' nature in explaining the corporate investment behavior of Pakistani and US Textile Sector listed firms. The strand of study provided practical implications to corporate managers and policy makers to establish optimum investment models which are customized and preferred according to nature of sectors.
... This section reports the GMM presented primarily for the entire samples of listed and delisted companies. Second, firms in each sample are divided into two groups on the basis of their dividend payout ratios (Arnott & Asness, 2003). Third, firms in each sample are sorted into two groups based on their market capitalization (Fatemi & Bildik, 2011). ...
Article
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This paper investigates the impact of both systematic and unsystematic risks on the dividend policy of 563 and 603 listed and delisted non-financial firms in the UK respectively. The data cover the period from 1992 to 2011. The authors propose a mathematical structure that presents a new measure of risk-adjusted dividends per share. The paper investigates the dividend behavior of delisted firms to assess whether the dividend decision is significant to listed as well as delisted firms and if a firm has been delisted due to a financing or an investment decision. The findings show that: (1) UK firms (both listed and delisted) adjust dividends per share to systematic and unsystematic risks; (2) earnings dictate dividend policy of listed firms alone; (3) leverage, cash flow per share and firm size are significant determinants of dividend policy for the two groups of firms; (4) listed firms lower their dividends at increased levels of cash flow volatility while delisted firms pay higher dividends as their cash flow volatility rises; (5) there is strong evidence in support of transaction cost theory for the listed firms; (6) the life cycle and residual theories cannot explain dividend policy in UK firms; (7) the general conclusion is that the differences in dividend policies Eldomiaty, Attia, Liu and El Din 2 of listed and delisted firms are quite minor indicating that if firms have been delisted; dividend decisions are not a significant factor. JEL Classifications: G32, G35
... His results suggested that profitability of firms decrease after dividend initiation which is contradicted to the signaling model that predicts improvements in firm profitability. Arnott & Asness (2003) challenged the perception that a higher payout ratio results in low future growth. They based their study on America Stock Market and found that higher aggregate-dividend-payout ratios were related with higher future earnings growth. ...
Article
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This study examines the relationship between dividend policy and return on investment of selected Nigerian quoted manufacturing firms from 1985-2014. Multi-dimensional data were sourced from Stock Exchange Fact book and financial statement of the quoted manufacturing firms within the period covered in the study. Multiple regression models were formulated having Return on Investment (ROI) as dependent variables while Dividend Payout Ratio (DPR), Retention Ratio (RR) and Dividend Yield (DY) were used as independent variables. Eighteen (18) manufacturing firms were selected from the population based on availability of required data. Ordinary least squares regression analyses with the E-view software package were conducted. Co-integration test, Granger Causality Test and Augmented Dickey Fuller Unit Root Test were used to examine the stationarity and the long run relationship between the dependent and the independent variable. Model I found that Dividend Payout Ratio, retention ratio and dividend yield have positive but insignificant relationship with Return on Investment. The Augmented Dickey Fuller test shows stationarity of the variables at first difference. The co-integration test reveals long run relationship between the variables while the Granger Causality Test reveals bi-directional relationship running through the variables. The study concludes that dividend policy has no significant relationship with the return on investment (ROI) of the quoted manufacturing firms in Nigeria. It therefore recommends an effective management of dividend policies to enhance the return on investment (ROI) of the quoted manufacturing firms in Nigeria.
... Despite numerous studies (Nissim & Ziv, 2001;Arnott & Asness, 2003;Farsio et al., 2004;Anazonwu et al., 2018) that have been done, the issue on dividend policy remains an unresolved issue in corporate finance and accounting literature. Researchers such as Lie (2005); Zhou & Ruland (2006); Amidu (2007); Howatt et al. (2009), have come up with different findings about the relationship between dividend payout policy and firm performance. ...
Article
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The purpose of this study was to examine the impact of dividend payout ratio on the value of firm. The study also examined other factors that affect the value of firm while employing companies listed on the Nigerian stock exchange. The factors which were considered to affect the value of the firm in this study include profitability, leverage policy ratio, dividend policy ratio, cash holding and the size of the firm. The study employed Panel Ordinary Least Square Regression Techniques in analyzing the collated data. The sample in this study is drawn from breweries and beverages companies listed on the Nigerian stock exchange between the periods 2007-2016. The results showed that profitability ratio and leverage ratio positively and significantly impact on the value of the firm. This implies that only the variables of Firm Leverage, and Profit after Tax are significant factors that drives firm value in both breweries and beverages companies among listed companies in Nigeria. The study however recommends that corporate managers whose interest is to raise firm value should ensure the maximization of Profit after Tax, and focus on policies that will improve the leverage ratio of the firm.
... However, firms generally pay dividends regularly, allowing investors to predict the dividends for the next period regardless of the timing of the declaration. According to the dividend signaling hypothesis, firms tend to pay dividends continuously because dividend payment has become a means of delivering information about the firm (Arnott and Asness, 2003;Nissim and Ziv, 2001). An analysis of dividend payment trends for our sample, which includes common stocks listed on the KOSPI and KOSDAQ from 1999 to 2016, reveals that the cash dividends are paid in the following period with an 85% probability if dividends were paid in the past 12 months. ...
Article
The dividend month premium is the phenomenon that firms have abnormal returns in predicted dividend month. This study aims to examine the dividend month premium in the Korean stock market, using common stocks listed on the KOSPI and KOSDAQ from January 1999 to December 2016. Abnormal returns are estimated using the following asset price models: capital asset pricing model, Fama–French three-factor model and the Fama–French–Carhart four-factor model. This study finds positive abnormal returns in predicted dividend months, and even for the within-firm portfolio that buys stocks in the predicted dividend months and sells the same stocks in other months. The price impact and the subsequent reversals are greater with lower liquidity and higher dividend yield, implying that the price pressure from dividend-seeking investors affects this dividend month premium. In addition, the anomalies with the pre-declaration stock are smaller than the post-declaration stock, suggesting the necessity to improve the cash dividend policy of post-declaration for market efficiency.
... According to Arnott and Asness (2003) the positive relationship between current dividend payout and future earnings growth is based on the free cash flow theory. Low dividend resulting in low growth may be as a result of suboptimal investment and less than ideal projects by managers with excess free cash flows at their disposal. ...
Article
Dividend policy occupies a major role in the financial management of an organization and serves as a mechanism for control of a managerial opportunism. The objective of the study is to ascertaining the relationship between dividend policy and firm's profitability, Investment and Earning Per Shares. Data for the study were extracted from annual report and accounts of Nine (9) quoted manufacturing companies in Kenya. These data were subjected to regression analysis, using e-view software and the findings indicate that; there is a significant positive relationship between dividend policies of organizations and firm's profitability, there is also a significant positive relationship between dividend policy and investments and there is a significant positive relationship between dividend policy and Earnings Per Share. It is recommended that Organizations should ensure that they have a good and robust dividend policy in place because it will enhance their profitability and attract investments to the organizations.
... Zhou and Ruland [18] indicated that, firms with high dividend pay-outs are likely to gain strong future profits. In the same vein, Arnott and Asness [19] opined that increase in future earnings tends to have a high dividend pay-out. A high dividend pay-out ratio means that, more funds are distributed to shareholder and less profit are retained for growth and development. ...
Chapter
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Dividend policy is a critical decision area, it is one of the most important financial policies decision, not only from the viewpoint of the company, also from that of the shareholders and other stakeholders. This study examined the relationship between dividends policy and market value of shares of quoted deposit money banks in Nigeria in relation with the restriction of dividend payments as spelt out in Section 17 of the Banks and Other Financial Institutions Act (2007). The objectives of the study were: to ascertain the relationship between dividend pay-out ratio; earnings per share; profit after tax; and market value of shares. The study was predicated on dividend relevance theory and irrelevance theory of dividend. The panel data research design methodology was adopted using secondary data. The secondary data were obtained from annual reports of the ten quoted deposit money banks. The multiple regression i.e. Panel Least Square method was used to test the relationship between the variables for the period 2001-2017. The results showed that dividend policy has a positive significant impact on market value of shares of deposit money banks in Nigeria, implying that all variables relating to dividend policy in the study under the period specified contributed positively and strongly to the market value of shares of deposit money banks listed in the Nigerian Stock Exchange. The study concluded that dividend policy is a pertinent corporate finance function and financial policy decision which affects the market value of shares of deposit money banks in Nigeria not only from the view point of the banks' shareholders but also from that of stakeholders such as employees and regulatory bodies. The study therefore recommended that, managements of quoted deposit money banks should take all necessary steps to ensure that they remain profitable. They should pay attention to their dividend pay-out in order to sustain their shareholders' wealth and attract prospective investors.
... This relationship is explained by the Theory of Free Cash-flow. Indeed, when the company does not pay dividends, this reflects weak growth, which may be due to problems of over-investment (Grossman and Hart, 1980;Arnott and Asness, 2003). Therefore, dividend distribution limits executive opportunism by reducing free cash flow and mitigates agency conflicts between executives and shareholders (Kanwal and Hameed, 2017). ...
Article
Purpose This paper has three main purposes. First, this paper aims to study the effect of corporate social responsibility (CSR) on firm financial performance. Second, this study aims to examine how mandatory CSR disclosure impacts financial performance. Further, this paper aims to investigate the intervening role of capital structure decisions on the relationship between CSR and financial performance. Design/methodology/approach Based on a sample of French non-financial listed companies over the period 2006–2017, this study uses structural equations modeling and a difference-in-differences approach to highlight these effects. Findings This paper finds that CSR has a significant positive association with financial performance. In addition, although the mandate does not require firms to spend on CSR, the socially responsible firms experience an increase in profitability subsequent to the mandate. Finally, this study argues and finds evidence that the relationship between CSR and financial performance is mediated through the capital structure channel. Originality/value This paper contributes to the literature in several ways. First, the study provides a new research stream by examining the effect of mandatory CSR disclosure on firm financial performance. Second, is to knowledge the first to examine whether and how CSR affects financial performance through the capital structure channel.
... The relationship between a company's growth and retention is abundant. It is expected that higher retained income in the present implies higher expected earnings in the future, but several recent kinds of research believe that low dividend payouts are indicators of expected future income (Arnott & Asness, 2003). Wahjudi (2020) found that total assets have insignificant and negative effect on the dividend policy of manufacturing firms. ...
Article
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The purpose of this study is to investigate the association between bank growth and the retained earnings amount for Jordanian banks between 2010 and 2020. The method to be used is regression models. Bank growth is measured using the change in total assets; income retention is measured by subtracting dividends from earnings per share and by deducting dividend per share from the operating cash flow on the accrual basis and cash basis. In addition, another specification will be used to the association between the growth of a bank’s total assets and income retention using the percentage change in the growth of a bank’s total assets and income retention on the accrual and cash basis. The findings of pooled OLS regression models and random effect models show that there is no relationship between income retention using the accrual basis and the bank total assets growth (Adj-R2 was –005). There is a significant relationship between income retention using the cash basis and the bank growth in total assets (Adj-R2 was 14%). There is no significant association between change in income retention using the cash basis and the bank growth in total assets, and bank size affects the relationship between income retention and bank growth in total assets. Users of financial statements need to be aware of the association between the several variables used in this study to make sound decisions.
... George and Kumudha (2006) used Lintner's model and indicated that current year's dividend per share is positively related to current years earning per share and previous year dividend per share (lagged dividend). Arnott and Asness (2003) studied the US stock markets (S&P500) and found that higher aggregate dividend payout ratios associated with higher future earnings growth. Both Zhou and Ruland (2006) and Gwilym et al. (2006) supported the findings of Arnot and Asness. ...
Article
The present study determined the dividend behaviour and firm performance before and after financial crisis period by using Lintner’s dividend policy model from the year 2000 to 2016. The findings of the study showed that after the crisis, firms are behaving conservatively. The study also indicated that investors are expecting consistent dividends from the firms during post crises period in comparison to the pre-crisis period. The study postulated that dividend behaviour of the Indian companies is sensitive to the changes in earnings. The study elucidated that dividend policy is relevant for firm performance and upsurge shareholder value.
... Analysed for one period, a DPR equal to 100% reflects a totally dedicated policy to pay dividends to shareholders, and one of 0% a reflection of a non-interest to dividends (argued in many cases as the company's interest for investing). DPR is used in a large variety of studies, as dependent variable (e.g., La Porta et al. 2000, Faccio et al. 2001, Fidrmuc and Jacob 2010, Jiang et al. 2017, but also as explanatory variable in different contexts (e.g., Lintner 1956, Arnott and Asness 2003, Baker et al. 2012, He et al. 2017). In such studies, the average DPR is often considered representative, as in the case of a Gaussian distribution. ...
Preprint
Dividend policy is still a largely discussed issue in corporate finance literature. One of the main indicators used in analysing the dividend policy is the dividend payout ratio. Using a database consisting of 12,085 companies operating in 73 countries, for the period 2008-2014, the authors found that the dividend payout ratio follows a Tweedie distribution, and not a normal one. This distribution is stable over time for the entire analysed period. In addition, it describes the case of almost all the countries included in the sample. Thus, a better estimation of the probability that dividend payout ratio is lower or higher than a benchmark can be provided. Also, an analysis of dividend policy, distinctly considering payer versus non-payer companies, can offer additional important information for both practitioners and academics. JEL G35 C01 C51 C55 A discussion paper, with Daniel Traian Pele and Hanaan Yaseen is available here: http://www.economics-ejournal.org/economics/discussionpapers/2019-41 Please, any comment or question is welcomed.
... Furthermore, firm leverage may impact the firm value negatively (Ammann et al., 2011). Moreover, research suggests that firm dividends enhance its value (Arnott and Asness, 2003). Similarly, the growth of a firm increases its value (Henry, 2008). ...
Article
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Purpose Kuwait has taken significant steps to reform its corporate governance (CG) by introducing the New Company Law (NCL) in 2013. This study investigates how this reform of CG mechanisms affects the disclosure of future-oriented information. Likewise, it explores how CG mechanisms affect the informativeness of this disclosure. Design/methodology/approach The sample comprises the nonfinancial firms listed on the Boursa Kuwait from 2014 to 2018. The study uses an automated textual analysis to measure the level of future-oriented disclosure in the annual reports of these firms. The informativeness of disclosure is proxied by firm value at three months of the date of the annual report. Findings The study finds that Kuwaiti firms with larger board sizes and substantial ownership by institutional investors are less likely to disseminate future-oriented information. Conversely, firms with more independent directors and larger audit committees are more inclined to provide future-oriented disclosure. Furthermore, the disclosure of future-oriented information carries contents that enhance investors' valuations of Kuwaiti firms, especially in firms with fewer institutional ownership and more prominent audit committees. Research limitations/implications It focuses on management decisions to disclose information in the annual reports. Examining other channels of disseminating information, such as social media disclosure, provides avenues for future research. Practical implications Policy setters in Kuwait should consider the importance of some CG mechanisms to improve the transparency of Kuwaiti firms, as suggested by the NCL. Likewise, investors should rely on such specific CG mechanisms to build their prospects about the firm's value. Originality/value Apart from developed countries, the current study is the first evidence on how CG mechanisms could affect the informativeness of future-oriented disclosure in a developing economy. It is also the first to investigate the new CG mechanism introduced by Kuwait NCL in 2013.
... Consistently, Officer (2011) finds that firms with a low firm value (Tobin's Q) have significantly more positive dividends initiation announcement returns than other firms. However, an association may exist between lower dividends and lower growth because of the suboptimal investment decisions by management (Arnott & Asness, 2003). ...
Thesis
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Forward-looking financial disclosure (FLFD) is potentially uninformative if it does not change from the previous year, especially after a significant change in firm performance. This study uses a sample of UK narrative statements of the annual reports over the period from 2005 to 2011. It employed the automated content analysis technique to measure change in FLFD over years to answer three research questions. First, to what extent does change in firms’ earnings performance drive managers to change FLFD over years? Second, what are the other drivers of the change of FLFD from year to year? Third, do investors use information revealed by the change in FLFD? The study finds a positive association between change in FLFD and change in firm earnings performance. However, it finds weak evidence that firms with larger changes in their earnings performance are likely to change their FLFD more than those with smaller performance changes. In addition, when we distinguish between well-performing and poorly performing firms, it finds that the change in FLFD is more positively associated with poorly performing firms compared to well-performing firms. Furthermore, it finds that change in FLFD is positively (negatively) associated with firm size, (competitive environment), (litigious environment), and (percentage of managerial ownership). In addition, the role of the auditor in overseeing narrative reporting is not appearing for all sample firms or for well-performing firms, however, it is observable only in poorly performing firms. Finally, the study uses firm value three months after the release of the annual report to examine investors’ responses to the changes in FLFD. It finds that the value of a firm decreases as long as it changes its FLFD from the previous year. However, when we distinguish between well and poorly performing firms, it finds that the change in FLFD has no effect on the value of well-performing firms, while, it negatively affects poorly performing firms. The results suggest that FLFD in UK narratives includes some content about firm performance. However, it neither affects the value of well-performing firms nor enhances investors’ valuation of poorly performing firms.
... flow of funds in the NCI equation (refer to equation 12), represents the net cash inflow in period t which is usually available to be added to the cash accounts (∆ 12 ) and to be distributed as a dividend in period t(Hamilton and Moses 1973;Morris and Daley 2009). To signal the managerial confidence in earnings growth and to meet the shareholders' expectations(Dickens et al. 2002;Arnott and Asness 2003), the financial model should accommodate the policy on minimum dividend to be paid to the shareholders. This policy constraint can be formulated as follows: ...
... George & Kumudha (2006) study supports Linter's model and indicate that current dividend per share is positively related to current earning per share and previous dividend per share. Furthermore, Arnott & Asness (2003) study confirms that higher aggregate dividend payout ratios associated with higher future earnings growth. Furthermore, using a sample of active and inactive stocks listed in NYSE and NASDAQ Zhou & Ruland (2006) explored the impact of dividend payout ratio on future earnings growth of companies. ...
Article
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In this research we aim to examine the partial adjustment model of the dividend policy for firms listed in one of the largest financial markets in the world. We use data from U.S publicly listed firms for the period from 1997 to 2017 and applies a panel data analysis. we find that that the U.S listed firms change their current payout ratio towards a long-run optimal payout ratio, also we find that the earnings is not affecting the dividend payout ratio, which indicates that the independence of dividend policy from dividend.
... Therefore when investment decision of the firm is given, the split of earnings between dividends and retained earnings is of no significance in determining the value of the firm. Black (1976) in his study on dividend wrote "The harder we look at the dividend picture, the more it seems like a puzzle with pieces that just don't fit together" The empirical studies from developed countries (Linter 1956, Baker 2007, Tse 2005, Armot and Asness 2003 have identified a positive relationship between dividend payout and share prices. Adaoglu (2000) examined dividend policy in developing country using corporations listed on the Istanbul stock market and contrary to the empirical evidence which support stability in dividend behavior of company in developed capital market, found out that Turkish companies followed unstable dividend policy. ...
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As the textile industry is one of the main sources of our country’s earnings for which the substantial investment from the shareholders is required. However, it is necessary to evaluate the effects of the textile policy to evaluate the dividend payout in order to enhance the investment in this respective sector. On the other, if the profitability of the sector would be higher, then ultimately firms will pay out the higher dividends. Thus, evaluating the effects of textile policy on the profitability of the textile sector is also crucial. The objective of the study is to find out the effects of textile policy on the profitability & dividend payout ratio of the textile sector of Pakistan. The policy implemented by the government in different tenure ones is from 2009- 2014 and the second is from 2015 to till date. The study used quantitative research-based yearly pool data of 9 years taken from financial statements of listed companies of the textile industry. Data were analyzed using multiple regression analysis. The findings indicated that no significant impacts found on the effect of policy change in 2015. The dividend payout ratio remained insignificant by the measures of the textile policy of the selected listed companies. Hence, there is an immense need for an improved policy for better outcomes in the textile industry as it is a prodigious sector in the economy of Pakistan. Available at SSRN: https://ssrn.com/abstract=3400706
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Using a large database of S&P 1500 index firms spanning an 88-quarter period from 1995 through 2016, we document that market cap (firm size), book-to-market ratio (a proxy for market perception of inverse of growth potential) and industry matter for determining Price-to-Earnings (PE) levels as a function of payout levels: current-period dividend payout is significantly and positively correlated with next period PE ratio for high market cap firms, and significantly and negatively correlated for high book-to-market firms. However, once the PE levels are determined, current period dividend payout change is significantly and negatively associated with next period PE change. We show that an increase in current period payout signals reduced investment opportunities and increased risk, which reduce PE ratios.
Chapter
As a representative of the capital market , the stock market has become a barometer of the national economy. The stock prices fluctuation plays as a benchmark role in leading public and private enterprises. This paper studied the relationship between the quarterly financial indicators and stock price movements in Chinas financial industry. Through the methods of literature research and empirical data statistical analysis, regression models are established to explore the relationship between these variables. The results indicated that total asset turnover rate has the largest impact on the stock price increase in financial industry companies among those selected financial indicators. Besides, we compared the results of banks and other financial enterprises to further research. It turns out that there is a big difference between Banks and non-bank financial enterprises. As for banks, there is a significant positive correlation between the multiple of cash dividend protection and stock price movements.
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Several theories and models have been documented on the relevance and irrelevance of dividend policy. Hundreds of authors continue to come up with various conclusions with regard to dividend policy from their empirical studies. This research attempts to study the impact of dividend payout on corporate profitability in the Manufacturing Companies listed on Colombo Stock Exchange in Sri Lanka. For this purpose, the data were extracted from the annual reports of the selected companies during the period from 2007-2011. Regression model is used to study and estimate the relationship between dividend payout and corporate profitability. The study also employed a subsample in order to arrive at a profound conclusion with regard to the impact of dividend policy on corporate profitability. The results of the study revealed that there was a significant relationship between dividend payout and corporate profitability in terms of return on assets, return on equity and earnings per share. A positive significant relation is found between dividend payout and return on assets and return on equity for the whole sample while significant negative relationship is found between dividend payout and earnings per share as far as the dividend paying sample is concerned.
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The market place is changing rapidly and corporate policies are evolving from what it used to be in the past decade. In the early 1960's to late 1980's investors coveted long term financial gains and capital appreciation and were uncomfortable when firms acquire debt to finance their business however the trend has changed over time with more and more investors expecting short term gains opposed to more traditional long-term financial strategies. Therefore this paper examined the impact of corporate financial policy on firm value of insurance firms in Nigeria for the period 2011 to 2017. In carrying out this study, expost-facto research design was employed and secondary data sourced from 25 insurance annual report and Nigeria Stock Exchange factbook for the period of 7 years. Pool time series data were extracted related to dividend payout, equity issuance, debt asset, equity asset, return on asset and Tobin Q was used as proxies for firm value in this study. The findings indicate that dividend payout and equity issuance have significantly impacted on firm performance (Tobin Q), the study also stated that ROA has no significant relationship with dividend payout, equity asset, debt assets and equity issuance during the period under study. It was recommended that insurance managers should devote adequate time in designing a dividend policy that will enhance firm's performance (ROA) and shareholder value. Again, the company should review its dividend policy in order to reduce agency cost and maximize the value of the company.
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This study examined the relationship between dividend policy and market value of shares of quoted deposit money banks in Nigeria in relation to the restrictions of dividend payments as spelt out in Section 17 of the Banks and Other Financial Institutions Act (2007). The objectives of the study were: to ascertain the relationship between dividend payout ratio, earnings per share, profit after tax and market value of shares. The Study was predicated on dividend relevance theory and irrelevance theory of dividend. The panel data research design methodology was adopted using secondary data. The secondary data were obtained from annual reports of the ten quoted deposit money banks. The multiple regression, i.e. Panel Least Square method, was used to test the relationship between the variables for the period 2001-2017. The result showed that dividend policy has a significant positive impact on market value of shares of deposit money banks in Nigeria, implying that all variables relating to dividend policy in the study under the period specified contributed positively and strongly to the market value of shares of deposit money banks listed in the Nigerian Stock Exchange. The study concluded that dividend policy is a pertinent corporate finance function and financial policy decision which affects the market value of shares of deposit money banks in Nigeria. The study, therefore, recommended that management of quoted deposit money banks should take all necessary steps to ensure that they remain profitable. They should pay attention to their dividend payout in order to sustain their shareholders' wealth and attract prospective investors.
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This explanatory comparative review uses pooled regression, weighted least squares and GLS panel analysis on 943 listed US firms (2005-2009), while examining the effect of corporate governance (good and questionable), profitability and sales revenue on dividends and investment, seeking to examine the different aspects of the dividend and investment puzzle. After rigorous robust scrutiny, the research empirically endorses the claim that Corporate governance pursue investment decision, while curbing dividend payout, profoundly by questionable corporate governance; cash dividends are seldom given in the US. Sales Revenue (and the firm’s value) boost investments, while its positive influence on dividends is insignificant. All other tactics impede Dividend policy, most profoundly by the firm’s value. Taxable income impedes investment. On the other hand, the firm’s value and sales revenue do significantly influence corporate investment decisions, as postulated by the pecking order, capital structure substitution and residual theories. The empirical results reveal the latent capitalization/expensing ploy used by listed firms.Results suggest that US firms prefer investing funds generated from sales revenue, while expensing off tax deductible profits, thus benefiting from both the virtues of capital investment and expensing. Tax implication as well as the fallacy of dividend avoidance is also examined, apart from recommending policy for regulatory authorities as well as governors (board of directors) of firms to pursue.
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The study explains the relationship of dividend payout policy on the business performance of companies that exist in automobile sector of Pakistan. 100 companies are selected from automobile sector. Relationship of dividend payout policy and business performance was controlled with four variables based on relevant theories. These variables include size of company, growth of company leverage debt to equity ratio and corporate governance index. Panel data is collected from 2012-2017 six years and then analyzed with unit root, descriptive statistics, correlation analysis, OLS regression, Lagrange multiplier, Huasman test, fixed effect and Random effect models. Following key findings for each research objective were obtained by applying the adopted research method on the data through the adopted method of analyses: The results showed that the automobile companies showed positive relationship between their dividend payout policy and profitability and it was concluded that both dependent and independent variables are positively related in this sector and size, growth and leverage are the controlling predictors of the relationship.
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This study sought to ascertain the impact of corporate governance on dividend decisions of non-financial firms listed on Pakistan stock exchange (PSX). Panel data was collected from 2011to 2016. Data was collected from Non financial firms annual reports and State Bank of Pakistan (SBP) data base. The STATA software was used to analyze the data. The study investigates the association of firm’s performance and corporate governance. Specifically, this study investigate dividend decision (dividend per share(DPS)), corporate governance (board independence ,board size, size of firm, leverage, profitability, Insider ownership, individual ownership, and institutional ownership). A total of 42 non-financial firms are used to determine this relationship. The results show a positive significant relation between the Profitability, individual ownership with DPS. This study also found a negative and significant relationship between insiders ownership, financial institution ownership with DPS. It has also been found that Board independence, board size, firm size and leverage have negative and insignificant relationship with dividend per share (DPS). Keywords: Corporate Governance, Dividend Decisions, Dividend Policy.
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Purpose This study aims to examine the value relevance of earnings in terms of predicting the value variables such as cash flow, capital investment (CI), dividend and stock return under the Indian institutional settings. Design/methodology/approach The study used panel Granger causality tests to examine causality relationships among variables and panel data regression models to check the statistical associations between earnings and value variables. Findings Based on a data set of 7,280 Bombay Stock Exchange-listed firm-years spanning over ten years from March 2009 to March 2018, the results show higher sensitivity of earnings toward cash flows, CI, divided and stock return and vice-versa. Further, the findings deduced from the empirical results demonstrate that earnings are positively related to value variables. Overall, the results established that earnings are value-relevant and have predictive ability to forecast the value variables that facilitate investors in portfolio valuation. The results are consistent with the predictive view of the value relevance of earnings. Several robustness checks confirm these results. Originality/value This study brings new empirical evidence from a distinct capital market, India, and provides a new facet to the value relevance debate in terms of its prediction view. The study is among earlier attempts that jointly measure the ability of earnings in forecasting different value variables by taking a uniform sample of firms at the same period. Hence, the study provides a comprehensive view of the predictive ability of reported earnings.
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The dividend policy is a pivotal policy around which other financial policies rotate. Appropriate dividend distribution policy can not only set a good corporate image, but also to build the confidence of investors in the company's future prospects. A review of literature reveals that the studies investigating the dividend policies of companies abroad have been conducted. The research work in this field is not enough yet in Bangladeshi context. No comprehensive study in this area has so far been made in the corporate sector in Bangladesh. Against this backdrop, the present study has been undertaken to evaluate dividend policy practices of listed companies in Bangladesh. The objectives of this study are to analyze the impact of dividend policies on market prices of shares, to identify the determinants of dividend policies of corporate firms, to examine the dividend policies practiced in corporate firms, to examine the application of existing dividend models in the context of Bangladesh, to identify the Flaws with the Existing Dividend Practices of Corporate Firm, to provide the policy implications of dividend policy to strengthen the capital market of Bangladesh. The hypotheses have been drowning on the basis of existing wisdom as well as theoretical framework of the study. The research findings and inferences of this study are expected to be useful to practitioners, investors, policy makers, researchers, and academicians. The sample includes listed financial and nonfinancial firms of DSE (Dhaka Stock Exchange). The size of population is 147 listed companies from where 22 companies from banking sectors and 86 companies from manufacturing sectors are taken as sample by applying stratified random sampling technique. The period of study is 20 years from 1994 to 2013. The secondary data have been collected by consulting available literatures and sources (companies’ annual report, publications of DSE etc.). The data thus collected have been tabulated manually and electronically. It can be worth mentioning that the study has collected opinions and views of board of directors, CFO (Chief financial officer) on 5- point likert scale. The Cronbach α of the data is found 0.810. This has substantial reliability of data collected through enumerators. The data have been analyzed by applying financial techniques, statistical techniques and econometric techniques. The financial techniques are-financial ratios, market ratio, market model, BHAR (buy and hold abnormal return) and the statistical techniques are descriptive statistics (mean, minimum, maximum, etc.), ANOVA, correlation, and regression. The pooled data OLS, GLS, panel data analysis (FE, RE), factor analysis, structural equation modeling have been used as econometrics techniques. The study has also used techniques like F test, Wald chi-square test, t test, chi-square test for testing hypotheses of the study. The study has been used the SPSS, STATA, EXCELL, AMOS for analysis of data. The study has been organized into eleven chapters. The study has examined the impact of dividend policy on the firm value by applying panel data analysis techniques (fixed effect and random effect) and it has found that the dividend policy has significant impact on the firm value. The R2 value of the models are 0.765 in FE and 0.69 in RE which signify the more accounting for higher variance of independent variables on the value of the firm. The outcome of this model has been line with the relevant theorem of dividend. The announcement effects of dividend on share price are analyzed with event study (market model and BHAR) and it is found that the dividend initiation announcements react on the market price of share around the event dates in both financial and nonfinancial sector. The dividend omission announcements also have impact on market price before and after the event date in only nonfinancial sector. The study has found a common behavioral model (The abnormal returns start to decline from day-4 and reach to lowest at event day then further start to raise. The abnormal returns reach to peack at day5 ). This finding has supported the wisdom of the signaling theory of dividend. The study has identified the determinants of dividend policy by applying OLS, FE, GLS, structural equation modeling techniques. Among the determinants, the lagged dividend payout ratio, sponsor, risk, profitability and leverage are positively significant and liquidity, sales growths are negatively significant to the dividend payout ratio in nonfinancial sectors. The lagged DPR, size of the firm and leverage have positive impact on the dividend payout ratio and the retained earnings ratio has negative impact on DPR in financial sector at 5 percent level of significance. The R2 of the models in nonfinancial sectors are 0.963 in OLS and 0.63 in FE and the R2 of OLS , GLS are 0.582 , 0.592 respectively in financial sectors which indicate the more accounting for higher variance of independent variables on the dividend payout ratio. A structural equation model on dividend determinants has been developed in this study. Factors Influencing Dividend Policy have been identified through survey from listed companies of DSE and analyzed with non parametric test and factor analysis. The study has found that the Earnings and liquidity factor, Past dividend issue factor, market price related factor are the most significant determinants in dividend decision in nonfinancial sectors and the ‘target payout and past dividend pattern factor’, ‘earnings and catering factor’, ‘liquidity and market reaction factor’ are important determinants of dividend decision in financial sector. So, the companies mainly consider the current earnings, liquidity position and pattern of previous years’ dividend payment of the company in the time of dividend payment. A theoretical model of dividend influencing factors has been developed from the findings. This thesis presents the dividend practices and performance of listed companies of Bangladesh. In Non financial sectors: The miscellaneous sector provides the highest payout. The DPS, EPS, MPS of the large size firm is better than small and medium size firms. The payout of the older firms is more than the newly listed firms. The highest payouts are in medium leveraged firm, low risk’s firm, medium PE ratio’s firm. The survey results have revealed that the both the shareholders and the companies prefer the cash dividend most. The most of the companies pay cash dividend with stable payout. The most of the companies follow increasing trend in dividend payment but no satisfactory research is conducted to justify the investors’ preference. In financial sector: The maximum payouts are in large size firm, earlier listed companies, low leveraged firm, and high risk’s firm, medium PE ratio’s firm. The survey results have revealed that the companies prefer both cash & stock dividend most but majority shareholders prefer stock dividend. The most of the companies follow stable payout with increasing trend in dividend payment but no satisfactory research is conducted to justify the investors’ preference. The study has examined the application of dividend models in Bangladesh by using factor analysis and parametric, nonparametric test and it is found that the catering theory, signaling theory, dividend relevance theory are the most important theories followed by the dividend decision makers in nonfinancial sectors. The dividend policy decisions are followed the signaling theory, bird- in-the hands policy, Lintner model, residual policy and life cycle theory in financial sector of Bangladesh. The important problems in dividend practices are identified by parametric test, nonparametric test and descriptive statistics from survey opinion of board of directors and the problems are ‘cash dividends affects on liquidity’, higher expectation of shareholders, imperfect capital market, regulatory changes, ambiguity of dividend, unanticipated economic change, insider trading. The other related problems are previous non- payment culture, lack of study on dividend policy, lack of dividend policy in firm, investors’ attitude toward dividend. On the basis of the findings and inferences, the study has suggested pragmatic policies and strategies for making appropriate dividend policies and finally making prudent dividend decision of corporate firm. The policy implications include corporate policy measures, strategic measures, model based suggestions and regulatory measures for optimum dividend policy decision. The important suggestions for dividend policy are regular dividend payment, maintain liquidity level, regularity measures for preventing information leakage and insider trading, enforcement of existing laws etc. This study represents the picture of the dividend performance and dividend policy in the corporate sectors in the Bangladesh. The developed models from this study will help the investors, policy makers, companies and related stakeholders. This research will explore the avenues of further research on dividend policy of an emerging market and act as a referred study.
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This paper aims to investigate the Mutual Fund industry's performance in Bangladesh, considering the close-end mutual funds of 32 listed funds in the Dhaka Stock Exchange, Bangladesh. The study employed unbalanced panel data analysis throughout 2014 to 2019. By using an error-corrected panel data regression model with an attempt to investigate the performance of mutual funds considering several fundamental factors such as Return on Assets, Earning per unit, Fund Size, Fund Age, Dividend payout ratio, Net Asset Growth and Management Fees, etc. After correcting autoregressive disturbance, the RE GLS regression model is selected to describe this panel data analysis. It demonstrates a significant positive connection between earning per unit and return on assets. The study identifies a significant negative relationship with fund age and asset growth in response to the change of return on assets. It also concludes there is no significant predictive power among the fund size, dividend payout ratio, management fees with return on assets while defining mutual fund performance. The study fills the gap by investigating the significant relationship of these following variables with the fundamental performance indicator. Findings of the empirical analysis suggest that the investors should pay close attention to earnings, fund age and assets growth while selecting mutual funds for investment. It is noticed that the company generally tends to pay lower dividend when the performance and profitability starts decrease. Policy makers should also pay attention to defining the downward characteristics of asset growth and dividend payout compared to the basic profitability ratios.
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This study examined the effects of dividend payments made by companies operating in the tire, iron-steel, pharmaceutical and chemical and automotive sectors on firm performance. For this purpose, analyzes were made in order to determine whether the dividend distribution policies implemented by companies in the tire, iron-steel, pharmaceutical and chemical and automotive sectors included in the BIST 100 between the years 2000-2021 during market slowdowns and expansions have a significant relationship on firm performance. In the study, firm performance was measured by normalized rate of return on assets (ROA), rate of return on cash flows, Tobin's Q, total shareholder return, closing price, growth rate in assets, cumulative performance and earnings per share. In this study, multiple regression analysis was performed to determine the relationships between these dividend payments and firm performance variables. As a result of this study, it was determined that in the slowing market condition the dividend payments made by these companies increased the performance of these companies which are operating in these sectors except for the iron and steel sector; Also, in the growing markets condition, it was determined that the dividend payments made by these companies decreased the firm performance of these companies which are operating in these sectors except for the pharmaceutical and chemical sector. The difference of this study from other studies is due to the limited number of studies examining the effect of these divident payments on firm performance in the tire, iron-steel, pharmaceutical and chemical and automotive sectors in Turkey.
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When can corporate social responsibility (CSR) become a reliable strategic asset? There is a scarcity of both theoretical arguments and empirical evidence investigating the trade-off between the risk and return of CSR. We intend to fill this gap by (1) investigating CSR’s simultaneous impact on firm value and the reliability of this impact, and (2) exploring the conditions under which CSR’s impact on firm value becomes more or less reliable. The presented findings suggest that CSR by itself is an unreliable value enhancer, in that it increases firm value but also increases the variance of expected value distribution. Yet, the impact of CSR on firm value becomes more reliable when a firm has immediately redeployable slack or when a firm has stronger risk management capabilities. This research provides practical implications to managers and investors regarding the riskiness of CSR investments and strategies for mitigating such risks.
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This paper surveys the literature on Dividend payout policy. Several discussions has made major theoretical and empirical contribution to the dividend literature, It is interesting to note that empirical literature on dividend policy is very vast and exhaustive at the international level and it is very much sporadic at the Indian level. Hence the International Studies and Indian Studies that have analyzed the factors that affect the dividend decision of a firm have been reviewed separately. This paper attempts to present the main empirical studies on corporate dividend policy. Finally it concludes with famous statement of Fisher Black about dividend policy "the harder we look at the dividends picture, the more it seems like a puzzle, with pieces that just do not fit together"(Black,1976) is still valid.
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The use of price-earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future divi- dend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our earlier paper (1998), to take account of the remarkable behavior of the stock market in the closing years of the twentieth century.
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In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors "really" capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.
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In the study reported here, we estimated the forward-looking long-term equity risk premium by extrapolating the way it has participated in the real economy. We decomposed the 1926–2000 historical equity returns into supply factors-inflation, earnings, dividends, the P/E, the dividend-payout ratio, book value, return on equity, and GDP per capita. Key findings are the following. First, the growth in corporate productivity measured by earnings is in line with the growth of overall economic productivity. Second, P/E increases account for only a small portion of the total return of equity. The bulk of the return is attributable to dividend payments and nominal earnings growth (including inflation and real earnings growth). Third, the increase in the equity market relative to economic productivity can be more than fully attributed to the increase in the P/E. Fourth, a secular decline has occurred in the dividend yield and payout ratio, rendering dividend growth alone a poor measure of corporate profitability and future growth. Our forecast of the equity risk premium is only slightly lower than the pure historical return estimate. We estimate the expected long-term equity risk premium (relative to the long-term government bond yield) to be about 6 percentage points arithmetically and 4 percentage points geometrically.
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This study demonstrates that the U.S. equity premium has declined significantly during the last three decades. The study calculates the equity premium using a variation of a formula in the classic Gordon stock valuation model. The calculation includes the bond yield, the stock dividend yield, and the expected dividend growth rate, which in this formulation can change over time. The study calculates the premium for several measures of the aggregate U.S. stock portfolio and several assumptions about bond yields and stock dividends and gets basically the same result. The premium averaged about 7 percentage points during 1926–70 and only about 0.7 of a percentage point after that. This result is shown to be reasonable by demonstrating the roughly equal returns that investments in stocks and consol bonds of the same duration would have earned between 1982 and 1999, years when the equity premium is estimated to have been zero.
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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
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Sumario: Part one: value -- Part two: Risk -- Part three: Practical problems in capital budgeting -- Part four: Financing decisions and market efficiency -- Part five: Dividend policy and capital structure -- Part six: Options -- Part seven: debt financing -- Part eight: Financial planning -- Part nine: Shhort- term financial decisions -- Part ten: Mergers and international finance -- Part eleven: Conclusions
Article
Monthly stock returns from Smith and Cole (1935), Macaulay (1938), and Cowles (1939) are compared and contrasted with the returns to the Center for Research in Security Prices value-weighted portfolios of New York Stock Exchange (NYSE) stocks. Daily stock returns from Dow Jones (1972) and Standard and Poor's (1986) are compared and contrasted with the returns to the Center for Research in Security Prices value-weighted portfolios of NYSE and American Stock Exchange stocks. Effects of dividends, nonsynchronous trading, and time averaging are analyzed. Splicing together the best indexes gives monthly data from 1802-1987 (2,227 observations) and daily data from 1885-1987 (28,884 observations). Copyright 1990 by the University of Chicago.
Article
This article takes a critical look at the equity premium puzzle the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions
Article
Monthly stock returns from Smith and Cole [1935], Macaulay [1938] and Cowles [1939J are compared and contrasted with the returns to the CRSP value and equal-weighted portfolios of New York Stock Exchange (NYSE) stocks. Daily stock returns from Dow Jones [1972] and Standard & Poor's [1986] are compared and contrasted with the returns to the CRSP value and equal-weighted portfolios of NYSE and American Stock Exchange (AMEX) stocks. Effects of dividends, nonsynchronous trading and time-averaging are analyzed. Splicing together the best indexes gives monthly data from 1802-1987 (2,227) observations) and daily data from 1885-1987 (28,884 observations.) This working paper was produced incompletely - several pages of the original were missing and others were duplicated. To see a complete version of this paper click here
Article
Record low dividend yields and record high market-to-book ratios in recent months have led many market watchers to conclude that these indicators now behave differently from how they have in the past. This paper examines the relationship between traditional market indicators and stock performance, and then addresses two popular claims that the meaning of these indicators has changed in recent years. The first is that dividend yields are permanently lower now than in the past because firms have increased their use of share repurchases as a tax-advantaged substitute for dividends. The second claim is that the implementation of Financial Accounting Standard (FAS) 106 for retiree health liabilities has seriously depressed the reported book values of many companies since the early 1990s, artificially raising their market-to-book ratios. We conclude that, even after adjusting for these factors, the current level of market indicators is a cause for concern.
Article
The value of U.S. corporate equity in the first half of 2000 was close to 1.8 times U.S. gross national product (GNP). Some stock market analysts have argued that the market is overvalued at this level. We use a growth model with an explicit corporate sector and find that the market is correctly valued. In theory, the market value of equity plus debt liabilities should equal the value of productive assets plus debt assets. Since the net value of debt is currently low, the market value of equity should be approximately equal to the market value of productive assets. We find that the market value of productive assets, including both tangible and intangible assets and assets used outside the country by U.S. subsidiaries, is currently about 1.8 times GNP, the same as the market value of equity.
Article
The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long-horizon returns, however, only (scaled) stock prices matter. Forecasts of low long-horizon stock returns in the mid-1990s are caused not by earnings or dividends, but by high stock prices. Copyright The American Finance Association 1998.
Article
The difference between reported price-earnings ratios in the United States and Japan is not as puzzling as it appears at first glance. Nearly half the disparity is caused by differences in accounting practices with respect to consolidation of earnings from subsidiaries and depreciation of fixed assets. If Japanese firms used U.S. accounting rules, we estimate that the P/E ratio for the Tokyo Stock Exchange would have been 32.1, not the reported 54.3, at the end of 1988. Accounting differences are unable, however, to explain the sharp rise in the Japanese stock market during the mid-1980s. Changes in required returns on equities, or in investor expectations of future growth for Japanese firms, must be invoked to explain this phenomenon. Real interest rates declined during the period of rapid price increase, but there is little evidence that growth expectations became more optimistic. The real interest rate changes do not, however, appear large enough to fully account for the change in stock prices.
Article
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
Article
We analyze the market for corporate assets. There is an active market for corporate assets, with close to seven percent of plants changing ownership annually through mergers, acquisitions, and asset sales in peak expansion years. The probability of asset sales and whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. The timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms. Copyright The American Finance Association 2001.
Article
Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. The authors investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year -1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat 'permanent'. In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years. Copyright 1997 by American Finance Association.