The Life-Cycle, Dividend Growth, and Payout Policy

Abstract

We investigate the relationship between firm maturity, dividend growth and dividend payout policy. As the firm matures and becomes less volatile, we find that the probability of dividend growth increases. Consistent with the life-cycle hypothesis, young dividend paying firms with larger growth opportunities (higher sales growth rates) will retain most of their earnings and have lower distribution (lower dividend payout ratios). Mature dividend paying firms with lower growth opportunities (lower sales growth rates) will retain less of their earnings and have higher distribution of earnings (higher dividend payout ratios). Although dividend distributions increase with maturity, the dividend growth rate declines as a firm matures. We show that a more comprehensive definition of firm maturity better proxies the firm’s life-cycle since the individual measures of maturity are not always significant. While standard deviation is the only significant maturity variable that determines the probability of dividend growth, both age and standard deviation are significant maturity variables related to the dividend payout ratio. On the other hand, the dividend growth rate depends on all of the maturity variables-age, earned capital ratio, and standard deviation. Use of a single maturity measure is problematic.