Expectation Of Dividends Research Articles

ESG rating, corporate dividends policy, and the moderating role of corporate life cycle: Cross country study

AbstractThis article investigates the link between environmental, social, and governance performance (ESG) and dividend policy, as well as how likely the corporate life cycle might moderate this association. Using cross‐country data from 2010 to 2020, the findings of this study reveal that ESG has a favorable influence on corporate dividend payments as measured by dividend payout ratio, dividend yield, and dichotomous variable. This conclusion holds true when the three ESG pillars are examined independently on dividend policy measurements. Furthermore, this analysis reveals that the firm's life cycle stage moderates the association between ESG and corporate dividend policy, exhibiting a negative moderating impact. This study specifically reveals that the relationship between ESG and dividends is stronger for firms in the early stages of their life cycle than for those in the mature stages. This relationship applies to firms operating in developed economies compared to developing economies. The study findings particularly highlight the dynamic nature of the link between ESG and dividends, underlining that this relationship is dependent on the stage of a company's life cycle. Understanding this relationship may assist stakeholders, such as investors and management, in making educated decisions about dividend expectations and sustainable practices depending on the life cycle of a firm.

The impact of CEO political ideology on labor cost reductions and payout decisions during the COVID-19 pandemic

Using a hand-collected dataset, we study whether CEO political ideology affected S&P 500 firms’ reactions to the COVID-19 pandemic in 2020. During the pandemic, CEOs had the option to distribute the pain of the pandemic’s impact onto shareholders by paying lower dividends, onto the workforce by reducing labor costs, or to share the pain. We hypothesize that conservative CEOs were more likely to aggressively reduce labor costs while still meeting dividend expectations. Conversely, other CEOs would have been less likely to meet dividend expectations and less likely to reduce labor costs. Our findings support this hypothesis. We also find that during the pandemic, conservative CEOs used temporary downsizing to avoid earnings losses, enabling them to meet dividend expectations.

Unconsolidated separate financial statements and dividends: Evidence from Korea

The purpose of this study is to investigate whether Korean parent firms manage dividend payments by taking advantage of the Commercial Act of Korea and accounting discretion allowed under the Korean IFRS. While IFRS adoption has transformed primary financial statements from unconsolidated to consolidated financial statements, the Commercial Act of Korea continues to compute distributable profits based on unconsolidated separate financial statements. The discrepancy between the earnings for financial reporting and the distributable profits provides an opportunity for a parent firm to manage dividends upward through internal transactions without affecting consolidated earnings. Using the parent firms listed on the Korea Exchange (KRX) during the period from 2001 to 2018, we examine whether these parent firms engage in dividend management through internal transactions to meet the dividend expectations of their shareholders in the post-IFRS period. We find that the parent firms with small consolidated but large unconsolidated earnings (‘SCLU’ firms) pay more dividends than others in the post-IFRS period when they have significant transactions with related parties. The dividend-increasing behavior of the SCLU firms through related-party transactions is more pronounced when the ownership of foreign shareholders or the largest shareholder is high. Our results suggest that Korean firms may pay excessive dividends by managing distributable profits despite poor consolidated performance in order to meet shareholders’ dividend demands.

Return and Dividend Expectations in the Cross-Section of Prices

Return and Dividend Expectations in the Cross-Section of Prices

Wealth effects of dividend regulation: Evidence from China

By exploring a natural experiment where the Chinese regulatory body introduced a dividend regulatory change in 2012, this article investigates the wealth effects of dividend regulation which increases firms’ dividends. I find that firms’ share price reacted positively (negatively) to regulatory events increasing (decreasing) investors’ expectation of dividends. The effects are more pronounced for firms with low dividends or domiciled in weak legal environments, robust to different research designs. The findings are consistent with the notion that low dividends in China are a manifestation of implicit contract failure. Dividend regulation provides remedies to low investor protection arising from weak legal environments. JEL Classification: G14, G35, G38, K22

The Option-Implied Ex-Dividend Drop

Several recent studies have used option-implied dividends to investigate the term structure of equity. A crucial question is whether these dividend strips need to be adjusted to take into account the difference in taxation between dividends and capital gains. Unlike prior research, we find an option-implied ex-day decline that is less than the cash dividend and of a similar magnitude to the overnight ex-day stock price decline. In addition, we use put-call arbitrage to identify several option mispricing factors. Our method for calculating market expectations of dividends is useful for research topics including dividend policy, analyst forecasts, and asset pricing.

Dividend guidance to manage analyst dividend expectations

Using a sample of dividend payers from 12 European countries, we document that managers guide analyst dividend expectations to avoid reporting dividends below the consensus forecast. Specifically, we show that dividend guidance predicts (1) a substantial reduction in analyst dividend forecast optimism over the course of the fiscal year and (2) that a firm will meet or beat the consensus dividend forecast by a small margin. Managers guide analyst dividend expectations to avoid negative price reactions when reporting negative dividend surprises. Our results, which are robust to endogeneity and self-selection concerns and control for contemporaneous earnings guidance, highlight the important role dividend guidance plays in managing analyst dividend expectations.

Financial Markets with Hierarchical Information

We present a financial market with investors who have nested private information. Small perturbations of price informativeness, coming from distortions of dividend expectations, can trigger an oscillating shock throughout the economy that destabilizes the feedback loop between prices and expectations. Moreover, decreasing the volatility of liquidity trading makes the equilibrium less stable. We investigate what the distribution of informed investors implies for equilibrium stability and for the risk premium of the asset. We find that different investor distributions have different implications, depending on whether adverse-selection or risk-sharing effects dominate in the economy.

Analyst Dividend Forecasts and Their Usefulness to Investors: International Evidence

Recent finance and accounting studies indicate that dividends are ‘sticky’ and declining in economic importance. If so, there should be little investor demand for analyst dividend estimates and analyst dividend forecasts should simply mirror time-series estimates. We examine firms from 16 countries spanning 2000-2013 and find that only 25% of firms exhibit sticky dividends, while the majority either increase (54%) or decrease (21%) their annual dividends. In contrast to the disappearing dividends view, we predict that this high variability in dividend payments across stocks actually increases investor demand for dividend information. Accordingly, analysts respond to this demand by producing informative dividend forecasts. Our analysis indicates that analysts’ dividend estimates are indeed useful to investors because they (i) are more accurate and better aligned with market dividend expectations than other estimates, such as standard time-series modelling approaches, (ii) convey incremental information to the market beyond that contained in other fundamentals, and (iii) help investors interpret the persistence of earnings news.

International Evidence on the Accuracy, Sophistication and the Usefulness of Analyst Dividend Forecasts to Investors

This study documents that analysts produce accurate, sophisticated and informative dividend estimates that are useful to investors. In a sample of 16 countries, we document that (i) analyst dividend forecasts are more accurate and better approximate market dividend expectations than time-series dividend forecasts, and that (ii) analysts exert effort to produce accurate dividend estimates, beyond the effort they put into forecasting accurate earnings. Dividend forecasts are useful to investors as (i) they convey incremental information beyond that contained in analyst earnings forecasts, target prices and stock recommendations and (ii) they help investors interpret persistence of earnings news. Cross-country variations in the accuracy and information content of dividend forecasts are explained by differences in the taxation of dividends compared to capital gains, importance of equity markets, quality of regulation, legal enforcement, and IFRS regulation.

Corporate Governance, Corporate and Employment Law, and the Costs of Expropriation

It is one of the well-known cornerstones of corporate governance that (minority) share-holders are subject to a risk of being expropriated by the controller of the firm, i.e. either entrenched management under a dispersed ownership structure or a controlling share-holder under concentrated ownership. On the other hand, economic theory has increasingly begun to recognize the role of employees and other nonshareholder constituencies during the past years. While potential shareholders may be reluctant to invest if they are adequately protected against private benefits of control, stakeholders may be deterred from investing if they are subject to the risk of ex post opportunism (e.g. holdup). Although both aspects may be important to corporate governance, their interaction has not yet been thoroughly investigated. In our model we study the incentives that influence the decision by the controller of the firm (either a controlling shareholder or manager) to divert resources from (other) shareholders and employees. We also analyze how these incentives vary, between firms, according to the specific corporate governance structure chosen by a certain firm and the degree of protection granted by the law. The effectiveness of diversion (i.e. the amount taken from the prior expectation of dividends or wages and additional implicit benefits) depends on the effectiveness of corporate law and employment law respectively against the taking of private benefits of control (to the detriment of shareholders) or the exploitation of (e.g.) holdup situations (to the detriment of workers). Naturally, the incentive of the controller to expropriate labor depends on his share in the firm, since shareholders (as a group) are the beneficiaries of holding up labor. Ex post, minority shareholders will therefore want the controller to exploit labor. Because of his increased financial incentive, a controlling shareholder will ceteris paribus have a larger financial incentive to hold up employees than a mere manager with a negligible share in the firm. By contrast, a strand in the corporate governance literature presupposes that large shareholders are better able to bond with labor than dispersed ones, while other authors emphasize that dispersed ownership helps managers to form long-term relationships with the firmýs stakeholders, and that large shareholders may be in a better position to exploit them. We elucidate the circumstances under which each of these two assumptions is correct. Furthermore, our model shows that employees will not only benefit from labor law, but also from corporate law protecting minority shareholder against expropriation, since it will reduce the financial incentive of a controlling shareholder to exploit employees. It also highlights how corporate law and labor law are interdependent in their effects on expropriation of both groups. Moreover, this interdependence has different effects depending on the corporate governance structure chosen by the company. The more careful analysis of our paper suggest that the crucial factor is not concentrated ownership as such (to the contrary), but other factors that can be identified as private cost of expropriation borne by the controller (be it a controlling shareholder or manager). For example, the literature on family firms suggest that controlling families may have a for a certain social position in the community and therefore be reluctant to take an overly tough stance vis-ý-vis employees. Similarly, a controlling manager may have a taste for empire building and therefore be reluctant to initiate redundancies and plant closures. Similar reasons for private costs of expropriation can be brought with regard to shareholders. The cost of expropriation therefore creates a commitment against expropriation that may encourage workers to make specific in-vestment and investors to buy shares. However, in some cases the private cost of expropriation that we identify as an important factor for the protection of shareholders and employees might be substantially reduced (or even negative). For example, the decreased probability of a hostile takeover in a corporate governance system with dispersed ownership and an effective market for corporate control could be seen as a negative private cost of expropriation that makes ex post opportunistic situations more likely. By varying the degree of ownership concentration and the amount and sign of the controllerýs private cost of expropriation, our model is able to explain the interaction of corporate and employment law in corporate governance systems and firm-level structures, such as Berle-Means firms (both with entrenched managers and an effective market of corporate control), publicly traded and privately held family firms, firms controlled by financial investors (including hedge funds), and professional partnerships such as law firms.

The Market Response To Unexpected Dividend Announcements

Research concerning the informational content of dividends continues to provide inconsistent results. This paper argues that this lack of consistency is the result of the definition of dividend expectations used in past studies. This study examines a broad cross-section of dividend policies and incorporates into the definition of dividend policy the full range of past sequence and timing of dividend changes.

Contesting “Good Governance” in Nigeria: Legitimacy and Accountability Perspectives

Close observations of governance in Nigeria have revealed a poor attempt at democratic consolidation and a stable politics. The studies have shown abysmal performance of public office holders in their quest to provide good governance and better living condition for the generality of the people. The system had experienced from them a battered economy, impoverishment of larger numbers of people, corruption and mismanagement of public funds infrastructure decay and a lot more others, hence they lack every iota of acceptability from the governed and invariably suffer legitimacy crisis. People's expectations of dividends and good life had been dashed on the altar of ineptitude, greed and lack of dignity. It is therefore pertinent to call attention of stakeholders to these malaise and attempt measures for revival of good governance and its attendant democratic consolidation.

The Effect of Risk on Price Responses to Unexpected Earnings

We investigate the possibility that earnings response coefficients (ERCs) are increasing in total risk (i.e., the sum of systematic and unsystematic risk). Our study extends the investigation of the role of risk in returns-earnings relations initiated by Easton and Zmijewski (1989) and Collins and Kothari (1989). Using the standard valuation model in which expected dividends are discounted at risk-adjusted rates, those studies show that ERCs should decline with systematic risk because the present value of a revision in expected dividends declines as systematic risk increases. We refer to this possibility as the “denominator effect” of risk on ERCs. In contrast, we posit a “numerator effect” of risk on ERCs. Specifically, we suggest that ERCs may increase with total risk because the sensitivity of dividend expectations to firm-specific news is an increasing function of risk. Our empirical work finds a robust positive relation between ERCs and total risk that is both economically and statistically significant; however, we find little empirical support for a negative relation between ERCs and systematic risk.

Discussion—The Effect of Risk on Price Responses to Unexpected Earnings

Chambers, Freeman and Koch test to see whether earnings response coefficients (ERCs), or stock returns per unit of unexpected earnings, are increasing in total risk. They generate this prediction from a model in which the sensitivity of dividend expectations to earnings news increases in total risk. They document a strong positive relation between ERCs and total risk, after controlling for variation in systematic risk and persistence. They do not find the negative relation between ERCs and systematic risk that prior ERC research had predicted and documented.I examine in turn the two central questions that Chambers, Freeman and Koch pose: (a) Which kind of risk do ERCs reflect: systematic, idiosyncratic or both (total)? and (b) Is the relation between ERCs and risk positive, zero or negative? I argue that accounting researchers’ inability to find a relation between ERCs and systematic risk is no surprise, given that modern finance research cannot document a relation between systematic risk and stock returns. I point out recent empirical work suggesting that earnings news has both numerator and denominator effects. I argue that the many research design differences between the current paper and previous ERC papers make it difficult to evaluate how much measurement error or model misspecification contributes to the different findings. I review recent empirical and theoretical finance research on idiosyncratic risk to place the paper’s findings in a broader context. Finally, I suggest avenues for further research.

Share Price Reaction to Dividend Announcements: Empirical Evidence on the Signaling Model from the Oslo Stock Exchange

This study tests the signaling theory of dividends by investigating the stock price reaction to dividend announcements on the Oslo Stock Exchange (OSE), and subsequent changes in the cash flows of the firms involved. This paper adds to existing evidence by examining the role of dividends in a market where the corporate ownership structure is notably different from the U.S. and the U.K., and where the motivation to use dividends as a signaling mechanism appears to be stronger. The results indicate significant abnormal stock returns are associated with announcements of dividend changes. The results are robust to alternative models of dividend expectations, after controlling for the impact of earnings announcements, and are consistent across sub-periods in the sample. The stock market reaction is most pronounced for large, positive dividend announcements that are followed by permanent cash flow increases. This evidence provides modest support for the signaling theory of dividends in Norway, but it does not support the proposition that corporate ownership structure is an important influence on the use of dividends as a signaling mechanism.

Analysts' Dividend Forecasts and Dividend Signaling

This study complements existing research on the information content of dividends by focusing on the use of dividend expectations. We derive a measure of unexpected dividend changes, called dividend surprises, based on Value Line forecasts. Our results highlight a potentially serious sample misclassification arising from the extensively used naive dividend change method. Classifications of unexpected changes in dividends using dividend surprises result in stock price reactions and earnings changes that are consistent with the implications of dividend signaling models. Also, the approach followed in this paper permits the analysis of a significantly forgotten sample in previous event studies: Firms announcing no dividend changes in which investors (analysts) are expecting a change. We find that no change in dividends often reflects a negative dividend surprise and is indeed associated with negative stock price reaction and negative earnings changes. We provide evidence that the failure to find a relationship between dividend changes and future earning changes may be due to measurement error arising from misclassification of dividend changes. One implication of this study for future research is that empirical tests of dividend signaling models should incorporate dividend forecasts.

Shareholder Oppression & Dividend Policy in the Close Corporation

The receipt of a dividend is perhaps the most basic method by which a shareholder earns a return on its investment in a corporation. Because of the dividend's importance, scholars have long focused their attention on the fundamental question of when judicial intervention into a company's dividend policy is warranted. Significantly, however, this academic focus has concentrated almost exclusively on the publicly-held corporation. In that context, a number of authorities have argued that there is little need for the judiciary to involve itself in compelling the payment of dividends, primarily because of the disciplinary effect of a well-established market. In the close corporation setting, however, this market-based rationale is wholly inapplicable. A close corporation, by definition, lacks a market for its stock. When close corporation dividend policy is at issue, therefore, a hands-off attitude by the judiciary makes considerably less sense. Although other scholars have previously made this observation, the academic discussion has not proceeded substantially beyond the observation itself. It is important, therefore, to return to the fundamental question and to consider it in the close corporation setting - i.e., when is judicial intervention into a close corporation's dividend policy warranted? To some extent, a consideration of this question has been aided by the development of the shareholder oppression doctrine. The doctrine of shareholder oppression attempts to safeguard the close corporation minority investor from the improper exercise of majority control. By identifying and protecting the of close corporation shareholders, including the expectation of dividends, the oppression doctrine combats majority shareholder efforts to exclude a minority investor from the company's financial and participatory benefits. Although the doctrine usefully acknowledges that close corporation shareholders can have expectations of dividends, the doctrine provides no guidance on whether an asserted expectation is reasonable, and thus enforceable, in the particular circumstances before a court. One could argue, therefore, that the shareholder oppression doctrine has simply rephrased the fundamental question. Asking whether judicial intervention into a close corporation's dividend policy is warranted, in other words, is functionally equivalent to asking whether a shareholder's expectation of dividends is reasonable in the circumstances. This article squarely addresses the issue of close corporation dividend policy and the question of when judicial intervention is warranted. More specifically, this article analyzes close corporation dividend disputes through the lens of the shareholder oppression doctrine. By examining when a shareholder's expectation of dividends is and enforceable, this article moves beyond the mere observation that close corporations require greater judicial scrutiny. Indeed, the article discusses the basic types of dividend disputes that arise in close corporations and provides guidance to courts for resolving such disputes.

Price and Volume Reactions to Public Information Releases: An Experimental Approach Incorporating Traders' Subjective Beliefs*

AbstractThis paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long‐lived financial asset. The objective is to study deviations from the symmetric information risk‐neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double‐auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash‐motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices under‐reacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. Forty‐three percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double‐auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short‐term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.

The Effect of Risk on Price Responses to Unexpected Earnings

We investigate the possibility that earnings response coefficients (ERCs) are increasing in total risk (i.e., the sum of systematic and unsystematic risk). As in prior risk-ERC studies, we model firm value by discounting expected dividends at risk adjusted rates. We argue that ERCs increase with total risk because total risk is positively associated with the sensitivity of dividend expectations to firm-specific news. This paper extends the investigation of the role of risk in returns-earnings relations initiated by Easton and Zmijewski [1989] and Collins and Kothari [1989] who point out that ERCs should decline with systematic risk because the dividend discount rate should increase with systematic risk. Our empirical work finds a robust positive relation between ERCs and total risk that is both economically and statistically significant; however, we find little empirical support for a relation between ERCs and systematic risk after controlling for the relation between ERCs and total risk.