The Dynamics of Corporate Dividend Policy: Revisiting the Slow Adjustments of Dividends to Target Payouts

Abstract

Past studies show that firms adjust dividends very slowly to their dividend targets. This paper reinvestigates the dynamics of corporate dividend policy using a generalized partial adjustment model. We show that firms adjust dividends to their target payouts much faster than previously documented. This study also shows that their target dividends are predominantly driven by firm-specific effects, and tend to become significantly more stable when managers form future earnings prospects adaptively. Thus, dividend-smoothing behavior could arise from their attempts to conform to the target payouts, thereby leading to higher dividend adjustment speeds.