Abstract
An attempt is made to determine to what extent companies take into account the effects of inflation in formulating their dividend decisions. The research design incorporates a two-stage regression approach which permits a determination of the incremental explanatory power of collinear variables. The research findings suggest that dividend decisions are best explained in terms of historic earnings. It therefore appears as if management does not take the effects of inflation into account in formulating dividend policy. This could have serious implications for the survival of a company because it could result in a real dividend cover of less than one.
Highlights
The debate as to whether companies should be required to report inflation-adjusted data, and if so, what the nature of the requirements should be, has been the focus of attention for a considerable number of years
In the US for example, the Securities and Exchange Commission released Accounting Series Release No 190 (ASR 190) (Securities and Exchange Commission, 1976) which was followed by Statement of Financial Accounting Standards No 33 (SFAS 33) (Financial Accounting Standards Board, 1979) and Statement of Financial Accounting Sta.'ldards No 82 (SFAS 82) (Financial Accounting Standards Board, 1984)
In the UK, the report of the Inflation Accounting Committee under the chairmanship of Sandilands was published (Inflation Accounting Committee, 1975). This had been preceded by an exposure draft, ED 8 (Accounting Standards Committee, 1973) and a provisional statement, PSSAP 7 (Accounting Standards Committee, 1974)
Summary
The debate as to whether companies should be required to report inflation-adjusted data, and if so, what the nature of the requirements should be, has been the focus of attention for a considerable number of years. Such market reaction studies do have numerous drawbacks (Hines, 1984), it is difficult to dispute the overall conclusion that inflation adjustments are not a significant source of information for stock market investors Such studies, whilst of considerable importance and interest, have paid attention exclusively to the reaction of share prices to the release of inflation-adjusted income measures. The purpose of this study is to submit evidence to this question This is done by extending the work of Bar-Yosef & Lev (1983) to determine the ability of inflation-adjusted income to explain changes in dividend over and above the explanation provided by historic income measures.
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