Catering and dividend policy: evidence from the Netherlands over the twentieth century

Abe De Jong,Philip Fliers,Henry Van Beusichem

doi:10.1017/s0968565019000209

Abstract

This article investigates the determinants of Dutch firms’ dividend policies in the twentieth century. We identify three distinct episodes and document shifts in dividend policies in the 1930s and 1980s, because firm managers cater to the changing preferences of shareholders. The first episode, prior to World War II, was characterised by dividends that were fixed contracts between shareholder and management and the payouts were mechanically determined by earnings. The second epoch of Dutch dividend policy, until the 1980s, was characterised by dividend smoothing. Dividends were still strongly related to earnings, but because of shareholder's preferences for stable dividend income, earnings changes are incorporated in dividends with a lag. Finally, dividend policy in the most recent episode is inspired by shareholder wealth maximisation, based on agency and signalling motives. In this period, dividends have become largely decoupled from earnings.

Highlights

After the seminal works of Modigliani and Miller (1958, 1961) and Black (1976), the most commonly cited arguments in favour of firm’s paying dividends are the reduction in agency costs (Easterbrook 1984; and Jensen 1986) and the value of signalling (Bhattacharya 1979; and John and Williams 1985; Miller and Rock, 1985)
How did dividend policies evolve in The Netherlands over the course of the 20th century? Second, how did the purpose of Dutch dividend policies change in this evolution? We describe the history of Dutch corporate finance and governance and examine the role of shareholder preferences in firm’s payout policies
Why do firms pay dividends? In what amounts do firms pay dividends? What are the value effects of dividend policies? We find the determinants of the answers to these questions are by no means be stable over time

Summary

Introduction

After the seminal works of Modigliani and Miller (1958, 1961) and Black (1976), the most commonly cited arguments in favour of firm’s paying dividends are the reduction in agency costs (Easterbrook 1984; and Jensen 1986) and the value of signalling (Bhattacharya 1979; and John and Williams 1985; Miller and Rock, 1985). For recent years, Fama and French (2001) show that the proportion of firms paying cash dividends has sharply declined. Brav et al (2005) show that recently US firms exhibited significant decoupling between earnings and dividends. The changing preferences of shareholders have been incorporated in the literature by Baker and Wurgler (2004a, 2004b), who show that firms’ dividend policies during the period 1963-2000 catered towards shareholders’ appetite, based on relative market valuations of (non-) dividend-paying stocks. Dividend policy has been studied in an historical context. Dividend policy for British firms has been studied by Turner et al (2013) over the period 1825-1870, while Braggion and Moore (2011) investigate British firms, over the period 1895-1905. Long-run evidence on dividend policies of Belgian firms over 18382012 has been provided by Moortgat et al (2017)

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Conclusion