Target Payout Ratio Research Articles

The effect of dividend smoothing on bond spreads: Evidence from Japan

This study investigates the impact of dividend smoothing on bond spreads, using data on Japanese bond-issuing firms. The regression results show that, although dividend smoothing is not systematically associated with bond spreads, it moderates the relationship between target payout ratios and bond spreads for firms facing serious conflicts of interest between shareholders and bondholders over dividends. Specifically, when the level of dividend smoothing is low, the relationship between target payout ratios and bond spreads is positive. However, when the level of dividend smoothing is high, target payout ratios are unrelated to bond spreads.

The dividend relevance pay-out model in the context of an emerging economy

Orientation: The dividend pay-out policy remains one of the key functional areas of corporate finance, more so in that it is through the receipt of dividends that shareholders can at least share in the profits of their investments.Research purpose: Because of the importance of the dividend decision (especially for emerging economies) as well as its possible link to value creation, the present study sought to providing results with recommendations on pay-out policy to improve dividend decision-making and establish a more defined link between dividends and value creation for management and shareholders alike.Motivation for the study: The endeavours of the current study lie in its contribution to the pay-out debate as it taps into a research area that has been explored minimally in emerging markets, yet it is still among the very topical functional areas of financial decisions.Research design, approach and method: The panel data of 110 Johannesburg Stock Exchange (JSE) listed sample companies for the period 2006–2018 were used. The sample was further grouped into value and growth companies. Dynamic panel estimators were used to analyse data.Main findings: The study confirmed results of similar previous research and identified further trends relating to the South African corporate setting. Specifically, the study found that companies have target pay-out ratios, which they adjust towards. Furthermore, managers are reluctant to change (increase) dividends, which may have to be cut again later, and in their endeavour to create and maximise value, they may have to sacrifice paying dividends. These trends are evident more with growth companies.Practical implications: These results mirror those of developed markets. Furthermore, the results present South African financial managers with an enhanced platform to create and maximise value for shareholders, relatively the same way as their counterparts in developed markets.Contribution/value-add: This study includes value-based variables among the explanatory variables. It is submitted that this process will enhance the endeavours of financial managers in creating values for shareholders through dividend pay-out.

The impact of the coronavirus pandemic on the dividend target payout ratio. The evidence from Hydrotor SA

Lintner’s (1956) partial adjustment model identifies the company’s long-term dividend policy by setting a dividend target payout ratio and the speed of adjustment. And although the model has undergone various modifications and methods of estimation over more than 60 years, it is still a good tool for analyzing dividend decisions made by companies. The aim of the article is to show the usefulness of the Lintner model for analyzing changes in the company’s dividend policy during the pandemic turmoil. For the illustration, Hydrotor SA was chosen, which, the longest time at the Warsaw Stock Exchange, continuously pays dividends. The calculations showed that the situation in 2020 resulted in a revision of the company’s long-term dividend strategy, which resulted in a lowering of the dividend target payout ratio and a greater attention to the current situation (current net profits)—an increase in the speed of adjustment.

Show Me the Money! Dividend Policy in Countries with Weak Institutions

ABSTRACTWe hypothesize that, in weak‐institution countries, firms adjust the ‘timing’ of dividend payments by committing to distribute a percentage of current earnings as dividends, revealing the extent of firm‐level agency conflicts to future investors and facilitating the raising of external capital. Consistent with this hypothesis, we find that, on average, firms in weak‐institution countries have a higher speed of adjustment (SOA) to their target payout ratio, pay dividends earlier in the life cycle, and are more likely to disclose a dividend policy committing to pay a minimum percentage of earnings. Within‐country tests show that, in weak‐institution countries, the firms with the highest SOA dividend policies have fewer agency problems and an increased ability to raise external capital. Finally, returns tests around earnings announcements show that high‐SOA dividend policies are associated with larger market reactions to earnings in weak‐institution countries. Collectively, our findings suggest that dividend policy helps to alleviate agency conflicts in weak‐institution countries between firms and (future) investors.

Show Me the Money! Dividend Policy in Countries with Weak Institutions

We hypothesize that, in weak-institution countries, firms adjust the ‘timing’ of dividend payments by committing to distribute a percentage of current earnings as dividends, revealing the extent of firm-level agency conflicts to future investors and facilitating the raising of external capital. Consistent with this hypothesis, we find that, on average, firms in weak-institution countries have a higher speed of adjustment (SOA) to their target payout ratio, pay dividends earlier in the life cycle, and are more likely to disclose a dividend policy committing to pay a minimum percentage of earnings. Within-country tests show that, in weak-institution countries, the firms with the highest SOA dividend policies have fewer agency problems and an increased ability to raise external capital. Finally, returns tests around earnings announcements show that high-SOA dividend policies are associated with larger market reactions to earnings in weak-institution countries. Collectively, our findings suggest that dividend policy helps to alleviate agency conflicts in weak-institution countries between firms and (future) investors.

Dividend policies of travel and leisure firms in the UK

Purpose This study aims to examine cash dividend practices of travel and leisure (T&L) companies listed on the London Stock Exchange (LSE). Design/methodology/approach The study uses a panel data set of 524 firm-year observations of 55 unique publicly listed UK T&L companies between 2007 and 2019. First, it uses a modified version of Lintner’s (1956) partial adjustment model for analysis regarding the target payout ratio and dividend smoothing. Second, it performs logit and Tobit models in ascertaining the association between financial characteristics and divided decisions of T&L firms. Finally, it applies the modified specification of the partial adjustment model on different sub-samples that are partitioned based on various financial factors to determine how the financial characteristics of T&L companies affect their dividend behavior. Findings The results show that UK T&L companies have long-term payout ratios and adjust their cash dividends by moving gradually to their target at a serious degree of smoothing. The findings also detect that financial characteristics of T&L firms (i.e. profitability, debt and size) have significant effects on their dividend payments decisions. In particular, more profitable and larger T&L corporations are more likely to pay cash dividends, whereas T&L companies with more debt are less likely to pay cash dividends in the UK. The results further reveal that although such financial characteristics also have important impacts on the target payout ratios and dividend smoothing levels, UK T&L companies generally adopt stable dividend policies over the period 2007-2019. Originality/value This is thought to be the first study to provide insights on dividend policy practices of UK travel and leisure corporation listed on the LSE.

Dividend Policy and Smoothening Behavior of the Southeast Asian Countries Including Japan

This study examines the dividend policy and smoothening behavior of major Southeast Asian countries including Japan. The study uses firm specific variables including corporate governance measures as independent variables. The results indicated financial leverage, return on equity, asset tangibility, Tobin Q, market concentration (HHI), and life cycle are the main determinants of dividend policy for the Southeast Asian region. In addition to this, the corporate governance measures (board composition, audit quality, and ownership structure) are also found as significant determinants of dividend policy of the selected economies. However, the results for cash flow and business risk are found to be contradictory due to their insignificant impacts on dividend policy in some economies. Thus, the study concludes that most determinants of dividend policy are similar within the regions. The study also used probit model in order to find probable factors that may influence the dividend policy and the results show similarity between determinants of dividend policy and probability factors that influence dividend policy. The probable factors are the same as the determinants of dividend policy. In addition to this, the study also tested the application of Lintner model, and the results clearly depicted that last year dividend as well as the current year earnings are the main factors that impact dividend policy of the firms within the region. More so, focusing on the speed of adjustment and target payout ratio of the firms, the study unties that firms have moderate speed of adjustment, and management is reluctant to cut dividends. Lastly, the target payout ratios of the firms also suggest that firms do have moderate target payout ratio except for Singapore with target payout ratio almost equal to 1. Conclusively, the study reveals that the determinants of dividend policy for the Southeast Asian countries are quite similar, firms do follow smooth dividend policy, and management is reluctant to cut dividends in the long run.

Taxation, corporate governance and dividend policy in Brazil

Purpose This study aims to analyze the influence of taxes and corporate governance on the dividend policy of Brazilian companies. Design/methodology/approach The authors identify the changes of the tax legislation in Brazil in the period 1986-2011 and check their effect on corporate dividend policies for preferred and common shares. The authors use panel data Probit and Tobit estimation to verify the probability of companies to pay dividends under different tax regimes. The final sample comprises 672 companies, 1,159 traded stocks and 30,134 observations Findings The authors’ results suggest that changes in the tax legislation have a significant influence on dividend payments. Also, firms do not follow target payout ratios, but dividends are moderately dependent on past payments. Dividend payouts are affected by stock voting rights, privatization and dividend deductibility. Changes in regulation that reduce the agency problems among shareholders affect positively payout ratios. Practical implications For managers, maximizing shareholders’ value requires taking into account the consequences of the taxation when designing financial policies for the firm. For investors, stock portfolio selection should take into account payout behavior and how changes in dividend taxation affect stocks’ value. For policymakers, the effects of changes in the tax code on corporate behavior are of utmost importance to stimulate private investment and economic growth. Originality/value There are several tax law changes in Brazil within the period analyzed, creating a good opportunity to study the effect of taxation on dividend policy and its dynamics over time.

Dividend Smoothing and Business Groups: Evidence from Indian Companies

This article examines the determinants of dividend smoothing behaviour of business group-affiliated firms relative to unaffiliated firms in India during the period from 1994–1995 to 2012–2013. The study is based on 240 sample firms listed on the National Stock Exchange (NSE) that has continuous dividend data for the entire period. The business group-affiliated firms tend to smooth their dividend payments more than that of standalone firms and the actual payout ratio as well as the target payout ratio of business group-affiliated firms is higher than that of standalone firms. For the determinants of dividend smoothing, the investment opportunities and the financial leverage are the significant factors influencing the dividend smoothing behaviour of business group-affiliated firms and standalone firms, respectively. For the entire sample, the firms with high investment opportunities, low leverage, high business risk and that are smaller in size tend to smooth their dividend payments more. As for the macroeconomic factors, the high dividend distribution tax (DDT) imposed by government tends the firms to smooth their dividend payments more. Overall, the results support the information asymmetry and agency-based explanation of dividend smoothing behaviour.

Why do firms smooth dividends? Empirical evidence from an emerging economy India

The present study examines the determinants of dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-1995 to 2012-2013. The empirical results show that Indian firms have target payout ratios, adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as the USA, Germany and France and thus, tend to smooth and stable their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier and smaller firms tend to smooth their dividend more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend the firms to smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.

Why do firms smooth dividends? Empirical evidence from an emerging economy India

The present study examines the determinants of dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-1995 to 2012-2013. The empirical results show that Indian firms have target payout ratios, adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as the USA, Germany and France and thus, tend to smooth and stable their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier and smaller firms tend to smooth their dividend more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend the firms to smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.

Corporate dividend decisions and dividend smoothing

PurposeThe purpose of this paper is to investigate the impact of regulations, reforms and legal environment on dividend policy in a different institutional setting. Particularly, it examines the firm-level cash dividend behaviour of publicly listed firms in Turkey in the post-2003 period, since there were major economic and structural reforms as well as significant regulatory changes of dividend payout rules imposed by the supervisory bodies.Design/methodology/approachThe paper focuses on a recent large panel data set of 264 Istanbul Stock Exchange (ISE)-listed firms over a ten-year period 2003-2012. First, it employs a modified specification of Lintner’s (1956) partial adjustment model for analysis regarding target payout ratio and dividend smoothing. Second, it performs a logit model for analysis in identifying the link between financial characteristics and the likelihood of paying dividends.FindingsThe results show that ISE firms now follow the same determinants as suggested by Lintner. They, indeed, have long-term payout ratios and adjust their cash dividends by a moderate level of smoothing, and therefore adopt stable dividend policies (although less stable policies compared to their counterparts in the developed US market) as a signalling mechanism over the period 2003-2012. Moreover, the results also report that ownership structure concentration affects the target payout ratio and dividend smoothing in the Turkish market. In addition, the results further show that more profitable, more mature and larger sized ISE firms are more likely to pay cash dividends, whereas ISE firms with higher investment opportunities and more debt are less likely to distribute cash dividends in the post-2003 period.Originality/valueTo the best of authors’ knowledge, this paper is the first major research that examines the implications of reforms and regulations on cash dividend payments and dividend smoothing over time in Turkey during its market integration process in the post-2003 period.

Flexible firm-level dividends in Latin America

We show, for a sample of up to 757 industrial firms, in seven Latin American countries from 1994–2014, that these firms exhibit comparatively flexible payout behavior. Flexibility is defined in respect to (i) variability in firm payout status and amounts and (ii) parameters of the Lambrecht-Myers (2012) theory on the Lintner (1956) dividend equation. The results indicate that Latin American firms have higher speeds of adjustment and target payout ratios as well as lower rates of habit formation than found in the payout policies of United States firms. This note, thus, highlights an open question regarding conspicuously flexible payout policies in Latin American firms.

Corporate dividend policy in practice: the views of Nigerian financial managers

Purpose– The purpose of this paper is to provide an additional insight into the dividend puzzle by investigating the field practice of dividend policy in an emerging market such as Nigeria. It also aims to contribute to the literature on industry-related dividend effect by examining whether managerial views on dividend policy vary between financial and non-financial firms.Design/methodology/approach– The study employs semi-structured interviews with the financial managers of 21 Nigerian listed firms. The interviewees were divided into two broad groups of financial vs non-financial firms based on the industry classification of the firms.Findings– The findings suggest that, despite differences in institutional environment, the dividend-setting process in Nigerian companies is similar in many extents to those in the USA and other developed markets. Nigerian companies exhibit dividend conservatism and typically focus on current earnings, stability of earnings and availability of cash when determining their current dividend levels. However, unlike in prior studies, the interviewees suggest that their companies do not have a target payout ratio; instead, they target the dividend per share when determining the disbursement level. Nevertheless, views regarding these issues vary significantly between financial and non-financial firms.Originality/value– This paper adds to the extant literature that has examined the behavioural aspects of dividend policy using interviews, especially in the context of less-developed markets such as Nigeria. The study also updates and extends prior evidence on an industry-related effect on managerial perceptions of dividend policy.

DIVIDEND POLICY IN REGULATED NETWORK INDUSTRIES: EVIDENCE FROM THE EU

We study the dividend policy of firms in regulated network industries, focusing on the impact of different regulatory regimes and government control. We link payout and smoothing decisions to different regulatory mechanisms (cost‐based vs. incentive regulation) and state versus private ownership. We test our predictions on a panel of listed European electric utilities, accounting for potential endogeneity of the choice of regulatory and ownership patterns. We find that incentive‐regulated firms smooth their dividends less than cost‐based regulated firms and that they report higher target payout ratios. Consistent with the interest group theory of regulation, we find that incentive regulation schemes are less likely when the state is still an important shareholder in the sector. Additionally, our results show that government control undermines the efficiency‐enhancing effects of incentive regulation on dividend policy, for example, lower smoothing is only due to private firms. (JEL G35, L51, L32, L9)

Dividend multifactor process, long-run risk and payout ratios

The purpose of this paper is to examine the theoretical relationship between the multidimensionality of risk and dividend policy, in an intertemporal context. After assuming that dividends are generated by a multifactor process, we use the fundamental framework of the consumption capital asset pricing model to explore the effect of long-run risk on dividend payout ratios (dividends divided by earnings). Our approach is similar to any multifactor model that, given the N factor process, derives useful equilibrium conditions. Our main result shows that the dividend payout ratio is negatively related to N sensitive coefficients, given by the long-run covariance between dividends and economic factors. This suggests that the multidimensionality of long-run consumption risk influences dividend policy. In brief, the model proposes that the target payout ratio can be determined with a simple and easy-to-apply formula that takes into account the long-run sensitivity of dividends to various economic factors.

Do Firms Smooth Their Dividends Over Time? Evidence from the Johannesburg Stock Exchange

This study examines dividend payout policies and the appropriateness of Lintner's dividend smoothing model on the Johannesburg Stock Exchange (JSE) listed firms. The ordinary least squares method is used to analyze the data using annual data from 1995 to 2011. The study found that the dividend smoothing model slightly overstates the payout ratio by two percent. The median long-run target payout ratio was found to be 40.76 percent compared to the actual payout ratio of 38.73 percent. The median speed of adjustment coefficient was 72.61 percent suggesting that firms partially adjust their dividends over time. The study concludes that despite the reduction in the number of dividend-paying firms in South Africa, the dividend smoothing model can be used to predict firms' target payout ratios. This has implications for equity investors who rely on dividends for achieving their investment objectives.

What drives the payout policy? evidence from Sri Lanka: a Dynamic Panel Data analysis

The study investigates payout policy of firms listed in the Colombo Stock Exchange. Balanced panel data of 82 firms for years are used, from 2006 to 2010. The study employs Generalized Method of Moments estimator, Dynamic Panel Data analysis. The results indicate a significant negative influence of lagged dividend on the payout behavior of firms. The firms do not pay dividends according to a target payout ratio; use dividends as a signaling device and mollify the market. Level of earnings negatively related to the probability of a dividend distribution; the dividend payments do not reflect the earnings volatility. The financial leverage is insignificant in explaining payout, and the size of the firm has no control over payout policy. Institutional shareholding is a key determinant, affects positively on payout. Results also indicate a negative relationship between dividends and Managerial ownership. The powerful principals are able to impose the firm for desired payout. These findings are consistent with agency models in which dividends reduce the problems associated with information asymmetry.

Dividend Policy Behavior in Emerging Stock Markets: Evidence from Vietnamese Stock Market

Several prior studies find that firms pursue a long-term dividend target payout ratio with a fairly standardized speed of adjustment in developed markets. However, some studies conducted in emerging markets show strange findings that firms have target dividend payout ratios but they fail to follow stable dividend polices. This study examines dividend policy behavior in Vietnamese stock market, an emerging stock market without mandatory dividend payment using fixed effects regression for panel data. The research results support the partial adjustment model that firms in Vietnamese stock market have stable dividend policy behavior.

Financial Deceitful Trick through Dividend Smoothing

Deceit sleeps with greed. So looking at the dividend alone, very rarely would it show fraud indicators. Existing models like Beneish model, Ratio Analysis or Altman Z-Score do not investigate the dividend trend per se but Lintner (1956) suggests that the actual and target payout ratio normally deviate from each other. With this in mind, the intention of the study was to investigate whether Malaysian firms paying dividend were involved in dividend smoothing activity. Findings from the regression analysis found supports for the established null hypothesis. One can therefore conclude that these Malaysian firms were involved in dividend smoothing activities.