Dividend policy: A selective review of results from around the world

Abstract

In a “perfect” market, Miller and Modigliani's celebrated dividend irrelevance argument holds, whereby a dividend payment or omission is identical in impact to changes in a firm's share structure. Consequently, the dividend payment itself is irrelevant to valuation; what matters is the firm's free cash flow. In the real world, the institutional and financial structure of markets matters. In the United States, explanations of actual dividend policy usually stress transaction costs, information costs engendering signaling and agency costs, taxes, and the legal system. Under the U.S. financial system many of these factors tend to be similar across firms, so that it can be difficult to disentangle their effects. However, it is to be expected that in a financial system organized differently results from the United States may not hold, so we may be able to identify the importance of factors largely suppressed in the United States. In this selective review we look at results from both comparative and international studies of dividend policy. As might be expected, we find that institutional structure—including a country's financial system, institutions, culture, and industrial organization—is important in determining dividend policy.