Low Dividend Yield Research Articles

Determinants of Dividend Smoothing: Empirical Evidence

We document the cross-sectional properties of corporate dividend smoothing policies and relate them to extant theories. We find that younger, smaller firms, firms with low dividend yields, more volatile earnings and returns, and firms with fewer and more disperse analyst forecasts smooth less. Firms that are cash cows, with low growth prospects, weaker governance and greater institutional holdings smooth more. We also document that dividend smoothing has steadily increased over the past 80 years, even before firms began using share repurchases in the mid-1980s. Taken together, our results suggest that dividend smoothing is most common among firms that are not financially constrained, face low levels of asymmetric information, and are most susceptible to agency conflicts. These findings provide challenges and guidance for the developing theoretical literature.

Going Private Transaction: Announcement Effects on Stock Price and Characteristics of Acquired Firms in Malaysia

Going private transactions increase tremendously of late in Malaysian stock market. This motivates us to study the driving forces of public-to-private transaction and stock price reaction surrounding buyout announcements. From 80 buyout proposals for the period 2001 to 2007, positive and significant abnormal returns of 19.35% is documented across 61 days surrounding event date. The finding corroborated with prior evidences that going private transaction generates positive shareholder wealth gains. Logit model was employed to estimate characteristics of firms that engage in going private transaction. The results show that firms that have larger cash balance, higher growth, higher profitability and borrowing capacity, lower dividend yield, undervalued, poorer collection policy and lower free float are more likely to go private. Using 34 holdout samples in 2008, the estimated model accurately classified 68.18% going private and non-going private firms.

ARE UK SHARE PRICES TOO HIGH? FUNDAMENTAL VALUE OR NEW ERA

Since the mid-1990s the dividend yield reached and largely remained at a historically low level, even accounting for the stock market correction in the early 2000s. This appears to suggest that prices are overvalued. However, alternative valuation models based upon comparing bond and equity yields suggest that, if anything, prices are undervalued. This paper seeks to provide answers to this seeming paradox. Preliminary results suggest non-stationarity of the dividend yield and bond yield‐equity yield differential, although the yield ratio is possibly stationary, casting doubt on mean reversion. Evidence from structural breakpoint testing suggests that all measures have been subjected to several mean level shifts throughout the sample period, and notably within the last decade, such that each series now fluctuates around a mean level lower than that experienced previously. Thus, the lower dividend yield and lower bond‐equity ratio do not necessarily imply equity mispricing but that concepts of pre-existing normal levels no longer apply. In explaining why higher equity prices are supported, we note that the last decade has seen a period of historically low and stable inflation and interest rates. Further, there is a strong positive relationship between inflation and the dividend yield. This more stable economic environment has led to more accurate valuation of stocks and lower required rates of return, thus supporting higher prices.

Analyst Incentives and the Financial Characteristics of Wall Street Darlings and Dogs

Wall Street darlings, stocks with consensus strong buy recommendations, tend to be stocks with recent positive EPS momentum and surprise, recent positive relative price momentum, and recent positive EPS forecast revisions. Darlings also have stronger balance sheets, in the sense of lower debt, and tend to have lower dividend yields. Finally, darlings also tend to have higher long-term EPS growth forecasts and lower book-to-market ratios. Wall Street dogs, stocks with consensus hold and sell recommendations, tend to have the opposite characteristics. <b>TOPICS:</b>Equity portfolio management, security analysis and valuation, portfolio construction

Empirical Evidence on the Existence of Dividend Clienteles

This paper provides new evidence on the existence of dividend clienteles for institutional investors. We directly examine individual institutions' preferences for dividend paying stocks based on the characteristics of stocks held in their portfolio. Many institutions follow persistent investment styles, maintaining relatively high or low dividend yield portfolios over time. Institutions which hold portfolios of higher yielding stocks are significantly more likely to increase their holdings in response to a dividend increase or sell their stock in response to a decrease. For a subset of institutions, we directly observe the proportion of their portfolio managed on behalf of taxable clients. Consistent with tax-induced dividend clienteles, institutions with more taxable clients are less likely to increase their holdings in response to a dividend increase. Finally, we show that stock price reactions to announcements of dividend increases are related to characteristics of the institutions holding the stock. Our results suggest that tax status as well as other factors are important in explaining observed clientele behavior.

Institutional and individual investor preferences for dividends and share repurchases

This study shows that individual investors prefer to invest in high dividend yield stocks and in dividend-paying firms whereas relatively lower-taxed institutional investors tend to prefer low dividend yield stocks and non-paying firms. Consistent with Brennan and Thakor's [Brennan, M. J., & A. V. Thakor. (1990). Shareholder preferences and dividend policy. Journal of Finance, 45, 993–1018] adverse selection model, informationally superior institutional investors are shown to prefer firms that engage in larger share repurchases whereas individual investors do not prefer share repurchases. These results are contrary to the widely held beliefs (a) regarding tax-based and non-tax-based dividend clienteles, (b) that firms pay dividends to encourage monitoring by institutional investors, and (c) that the personal tax rate on equity is low (or zero).

Domestic or international: Divestitures in Australian multinational corporations

Here we consider recent divestments made by Australian firms with subsidiaries in both domestic and overseas markets. When these companies divest, they are faced with the choice of selling a unit either in Australia or internationally. In this paper we analyze that decision and our results show that firms that elect to divest overseas are highly geographically diversified, large and with low dividend yield when compared to firms that choose to divest within Australia. We also find some evidence that these firms are using divestitures to exit from non-core business areas and streamline their operations.

Disparities in Geographic Performance: Some Effects on the Cost of Capital and the Payout Policy

We analyze the association of operating country profitability with stock returns on a large sample of Australasian, European and North American multinationals. Our evidence suggests that it heavily depends on investors' expectations of operating regions, which are not totally met. Investors in non-dividend paying stocks comparatively seem to be sensitive to both profitability levels and changes. By contrast, dividend-paying stock returns seem rather associated with profitability changes, connected with existing projects and permanent profitability, because the dividend policy measures may already contain information about the profitability of numerous foreign projects. A firm with a low dividend yield and dividend payout ratio may be valued more in terms of its future investment opportunities and dividend future growth. We find that the dividend yield and the payout ratio will generally be pushed down by regions of operations with many sustainable growth opportunities and pushed up by regions with relatively few profitable investment opportunities. However, excess transitory profitability from regions with many growth opportunities tends to be paid out through sporadic stock repurchases, while excess transitory profitability from regions with few profitable investment opportunities tends to be paid out through dividends.

A Re-examination of Dividend Policy: A Dynamic Panel Data Analysis

Through a cross sectional analysis of 48 firms, over a seven-year period, from 1996 to 2002, we try to shed some light into two sides. First of all, we research whether managers smooth their dividend policies or not. Besides, we outline the main determinants that may influence the dividend policy pattern. Specifically, we attempt to find answers to the following questions: Do Tunisian firms follow stable dividend policies or not? Do dividend yields differ across industries? What are the main factors that determine the dividend policy making? In the first section, Lintner's model is applied. Our results show that Tunisian firms rely on both current earnings and past dividends. However, it seems that dividends tend to be more sensitive to current earnings than prior dividends. Any variability in the earnings of the corporation is directly reflected in the level of dividends. However, dividend policy does vary across financial and non-financial industries. Our results uncover a low target payout ratio of respectively 16% and 27% for non-financial and financial firms while the adjustment speed respectively ranges from 0.68 to 1.56. Non-financial institutions adopt therefore a more smoothing dividend policy. Secondly, through a fully developed model, we highlight some factors that may influence the dividend policy pattern. First, riskier firms with high financial leverage pay out fewer dividends and have lower dividend yields. Furthermore, high-profitability firms with more stable earnings can also afford more dividends. However, larger investment opportunities deprive firms from higher dividends. Similarly, growing firms distribute fewer dividends. Additionally, dividends serve to reduce agency costs between the shareholders themselves only whereas the conflicts between insiders and outsiders seem to be not resolved with dividends. This matter holds true only in non-financial firms. In this vein, it should be noted that our analysis does show significant differences throughout financial versus non-financial industries. Finally, the size of Tunisian corporations has a systematic negative effect on dividend policy.

Institutional and Individual Investor Preferences for Dividends and Share Repurchases

Using aggregate data on institutional and individual holdings for the 1989-1996 period, it is shown that relatively lower (higher) taxed institutional (individual) investors prefer low (high) dividend yield stocks to high (low) dividend yield stocks. Also, individuals prefer dividend paying firms, whereas institutions typically prefer non-paying firms. Institutions show a weak preference for firms that engage in larger share repurchases, whereas individuals do not prefer share repurchases. These results are contrary to the widely held beliefs a) regarding tax-based and non-tax-based dividend clienteles, b) that firms pay dividends to encourage monitoring by institutional investors, and c) that the personal tax rate on equity is low (or zero).

Empirical evidence on the determinants of the stock market reaction to product and market diversification announcements

The announcement of product and market diversification projects lead to significant abnormal returns of 1.1%. However, the gains are higher for new products than for new markets, and for companies with high price-earnings ratios and low (or zero) dividend yields.

Can Rational Investors Overreact?

This paper proposes a rational model to explain why asset prices can be different from fundamental values. Following Krep (1982), when uncertainties that affect asset returns accumulate into the future, intermediate trading prices will reveal more information about the states of nature than dividends. Consequently, short-term investors anticipating intermediate trading will set the price differently from the fundamental value that is calculated from future dividends, generating an (artificial) overreaction price pattern from an econometrician's point of view. The price deviation from fundamental values can lead to well-known phenomena such as the closed-end fund discount, bubbles, crashes, and excess volatility. Using dividend yield as a measure for uncertainty accumulation, the model further predicts that dividend premium generally exists but has exactly the opposite sign within firms with good or bad investment opportunities, that size and value premium are more significant for firms with zero or lower dividend yields, and that return volatility increases in book-to-market and decreases in size and dividend yield. Empirical tests have confirmed these predictions and demonstrated that mimicking portfolios of cumulative uncertainty can generate highly significant risk-adjusted returns.

Firm characteristics and the impact of emerging market liberalizations

We provide a firm level analysis of the impact of capital market liberalization in 18 emerging markets. Consistent with models of international asset pricing, we find that firms’ stock returns increase during liberalization and that a majority of firms have lower mean returns and lower dividend yields after liberalization. We also find that emerging market firms have increased exposure to the world market and decreased exposure to the home market following liberalization. These changes in returns and exposures support the predictions of theoretical international asset pricing models. We also test and find support for the importance of size, local risk, foreign exchange risk, and cross-listing status in explaining the cross-section of changes in returns.

Foreign ownership in the Taiwan stock market—an empirical analysis

This paper investigates foreign ownership in the Taiwan stock market from 1996 to 2000. From the perspective of informational asymmetry, foreign investors appear to favor large firms and low book-to-market stocks. Analytical results show that foreign investors strongly prefer firms with high export ratios with which they are more familiar on account of their higher foreign sales. Foreign investors hold more shares of high beta stocks than of low beta stocks for small firms. However, this result does not hold for large firms, implying that large firms have lower investment barriers than small firms. Foreign investors, due to their different tax status, may also hold slightly more stocks with low dividend yield. However, evidence for this assertion is inconclusive, with only a weak effect displayed by the sample considered here.

Will Low Rates of Return on Stocks Continue?

This article is a follow-up to an analysis published in this Journal in 2000 that deals with the high level of market returns in the 1990s. Now we have the negative stock market returns in 2000 and 2001. While three years of negative stock market returns would be extremely unusual, a much more important issue for investors is the likelihood of lower expected returns for the future. We document that this is a function of the unprecedented decline in dividend yields. New probability analysis that focuses on the price appreciation component of total returns shows that a likelihood of earning the historical 11% compound annual average rate of return on stocks is not high when current dividend yields are considered. Instead, if low dividend yields continue, investors may need to adjust their expectations about expected returns on common stocks.

Implications of Low Dividend Yields for Investor

The authors document the extent of the dividend decline in the major indexes and consider its significance in the context of historical stock returns. The dividend component of total returns has been a major part of the average total return of approximately 11% on the S&amp;P 500 index that investors have enjoyed in the past. With dividend yields now averaging slightly above 1%, investors need to reexamine their expectations about the level of future market return consistent with that. The authors demonstrate that the probability of achieving average historical rates or return is low, given the entire history of S&amp;P returns since 1971. The role of dividends in returns from value versus growth strategies is also considered, and it is suggested that investors may need to revise their expectations in this regard also.

Price-Earnings Ratios, Dividend Yields and Real Estate Stock Prices

Executive Summary. Both dividend yields and past returns have predictive power for P/E ratios; hence they can be used as tools in forming a market timing and asset allocation strategy in stock markets. This study examines the extent to which changes in real estate returns, reflected in changes of property value and dividend yields, can have great effects on P/E ratios. The study is confined to four major real estate stocks in Hong Kong. It shows that a low dividend yield appears to be associated with a relatively high price-to-earning ratio. Variance of dividend yields tends to increase relative to the variance of earnings yield, with a rapid dividend adjustment at higher dividend payout ratios.

What's Next for the S&amp;P 500?

It is reasonable to expect the recent performance of the domestic equity markets to continue? This article suggests that the low dividend yield and high price-to-earnings ratio on the S&amp;P 500 imply that investors have reduced their required return on equities, probably because they have become more comfortable with equity investments. Going forward, equities are likely to earn less than the 11% compounded return enjoyed since 1926. Institutions may need to reevaluate their goals and investment strategies to better assure they maintain fund purchasing power net of spending.

The Role of Personal Taxes in Corporate Decisions: An Empirical Analysis of Share Repurchases and Dividends

This study investigates the impact of personal taxation on corporate managers' choices between share repurchases and dividends as a means of disbursing cash. Consistent with the notion that personal taxation influences the choice of disbursement method, we find that managers are more likely to choose a share repurchase if the firm has a low dividend yield, if the firm's stock has experienced losses or small recent capital gains, and if the payout occured before the Tax Reform Act of 1986. Further, managers are more sensitive to the shareholders' tax situations if institutional investors hold a large fraction of the shares.

Determinants of relative investor demand for common stocks : William M. Cready (Texas A&M University)

&#x0D; &#x0D; &#x0D; This paper examines the demand for a firm’s common stock by wealthy relative to less wealthy individual investors and by individual relative to institutional investors as a function of risk, information environment (proxied by firm size and S&amp;P 500 membership), and form of return payout (i.e., dividends versus capital gains.) The findings indicate that among individual investors demand for the stocks of riskier, larger, and low-dividend-yield firms increases with wealth. The findings also suggest that relative to individual investors, institutional investors prefer the stocks of larger firms, S&amp;P 500 firms, and firms paying low dividend yields. Overall, these results suggest that investors find a number of firm-specific factors important in their investment choices and that the importance of such factors varies systematically with investor size. Journal of Accounting, Auditing, &amp; Finance, Summer 1994, 9(3): 487-507. (Reprinted with permission of Journal of Accounting, Auditing, Q Finance.)&#x0D; &#x0D; &#x0D;