Dividend Policy and the Lintner Model: Why Do Firms Pay Dividends?

Abstract

For many years, firms payout policies have been discussed widely by economist and finance experts but there is no agreement on why firms payout cash. Firms chose to pay cash dividend to their shareholder and believed to have a payout policy but what determines it remains is a question. Despite the presence of low cost methods of maximizing shareholders wealth firms have maintained high dividend payments regardless of their earnings. Two economists, Miller and Modigliani have contributed a significant amount of research in explaining relevancy of firm’s dividend polices to the shareholders’ wealth. An early study by John Lintner was able to explain the payout policy of a firm but it failed to show what motivates firms to pay dividends. Several economists consider the role of taxes and shareholder preference in determining firm’s policy but evidences suggest that decision makes do pay too much consideration to these factors. Many studies have discussed the changing trends in dividends payouts while advocating the changing preference of manager’s with the rising popularity of share repurchases, our findings suggest the opposite - as we show that companies have actually increased the dividend payouts.