Revisiting the Dividend and Investment Puzzle: An International Review using US Corporate Governance Data

Abstract

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.