How does green credit policy affect polluting firms' dividend policy? The China experience

We explore how polluting firms alter their dividend policy in response to pressure from green credit policy. The green credit guidelines that China adopted in 2012 aim to promote credit supply in sustainable development. Meanwhile, this green credit policy forced polluting firms to access restricted credit supply and tightened bank monitoring. Using the adoption of the green credit policy as a quasi-natural experiment, we find that polluting firms tend to lower their dividend payments, consistent with the view that dividends act as an effective tool of liquidity management and a substitute to mitigate agency problems. This finding is more pronounced among firms with weaker corporate governance, greater financial constraints, and more green innovation output. Our further analysis suggests that the green credit policy forces polluting firms to engage in less dividend smoothing.     

Stakeholder conflicts and dividend policy

This paper compares the dividend policy of owner-controlled firms with that of firms where the owners are a minority relative to non-owner employees, customers, and community citizens. We find that regardless of whether owners or non-owners control the firm, the strong stakeholder uses the dividend payout decision to mitigate rather than to intensify the conflict of interest with the weak stakeholder. Hence, the higher the potential agency cost as reflected in the firm’s stakeholder structure, the more the actual agency cost is reduced by the strong stakeholder’s dividend payout decision. These findings are consistent with a dividend policy in which opportunistic power abuse in stakeholder conflicts is discouraged by costly consequences for the abuser at a later stage. Indirect evidence supports this interpretation.     

Testing dividend signaling models

This paper exploits a key monotonicity property common to dividend signaling models—the greater the rate that dividend income is taxed relative to capital gains income, the greater the value of information revealed by a particular dividend yield—to distinguish the hypothesis that dividends are used as a signaling device from the hypothesis that dividends contain information but are not used as Spencian signals. The monotonicity conditions are tested with robust nonparametric techniques. While the monotonic relationship predicted by signaling theory can be found, a more careful inspection reveals that it does not hold for different levels of the dividend signal, as required by signaling theory. This strongly suggests that existing signaling models cannot explain the dividend policy choices of firms.     

What factors determine dividend smoothing by US and EU banks?

Using a relatively large sample of European and US banks for the period 1998–2016, we investigate the determinants of bank dividend smoothing based on agency, asymmetric information and risk‐shifting theories. We show that dividend payout ratio smoothing practices were implemented on both continents before and after the crisis of 2007 and were more strongly pronounced for EU banks. Our findings mostly support agency‐based explanations of bank dividend behavior as evidenced by higher payout ratio smoothing for banks with higher (initial) dividend payouts, lower ownership concentration, public banks, and banks with lower growth opportunities and weaker investor protection. Evidence in favor of asymmetric information explanations is stronger for EU countries, where smaller (more opaque) banks appear to smooth more. In both continents, banks that rely more heavily on equity issuances are found to smooth dividend payout ratios more, suggesting that banks aim at improving access to equity markets. We also provide evidence in support of risk‐shifting, as evidenced by the persistence of dividend payout ratio smoothing in the crisis years and higher dividend smoothing for banks under greater regulatory pressure. Additional analysis using a time series partial adjustment model for dividend levels provides evidence supporting the prevalence of dividend smoothing and the suggested theoretical explanations.     

CEO and CFO equity compensation and dividend payout over the firm lifecycle

We examine the separate and joint effects of CEO and CFO equity compensation on the dividend payout decision, taking into account changes in the relationship over the firm's lifecycle. Compensation contracts and dividend payout both are used to reduce agency costs, which change over a firm's lifecycle. Studies report a negative association between CEO equity compensation and dividend payout, suggesting a substitutionary relationship. Our results show that when the two are considered jointly, CFO equity compensation dominates CEO compensation, indicating the need for sophisticated financial expertise in the dividend decision. The relationship appears only in mature firms, signifying that agency problems are of most concern during the mature stage of the firm lifecycle.     

The Role of Banks in Dividend Policy

We use loan‐specific data to document a significant inverse relation between a firm's dividend payouts and the intensity of a firm's reliance on bank loan financing. Banks limit dividend payouts to protect the integrity of their senior claims on the firm's assets. Moreover, dividend payouts decline in the presence of monitoring by relationship banks, which acts as an effective governance mechanism, thereby reducing the gains from precommitting to costly dividend payouts. Bank monitoring and corporate governance (insider stake and institutional block holdings) are complementary mechanisms to resolve firm agency problems, both reducing the firm's reliance on dividend policy.     

The dividend month premium

We find an asset pricing anomaly whereby companies have positive abnormal returns in months when they are predicted to issue a dividend. Abnormal returns in predicted dividend months are high relative to other companies and relative to dividend-paying companies in months without a predicted dividend, making risk-based explanations unlikely. The anomaly is as large as the value premium, but less volatile. The premium is consistent with price pressure from dividend-seeking investors. Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-day (when there is no news about the dividend) and larger reversals afterward.     

Optimal dividend policy and growth option

We analyse the interaction between the dividend policy and the decision on investment in a growth opportunity of a liquidity constrained firm. This leads us to study a mixed singular control/optimal stopping problem for a diffusion that we solve quasi-explicitly by establishing a connection with an optimal stopping problem. We characterize situations where it is optimal to postpone the distribution of dividends in order to invest at a subsequent date in the growth opportunity. We show that uncertainty and liquidity shocks have an ambiguous effect on the investment decision.      

The accuracy of analysts' dividend forecasts around the world

We examine the link between the accuracy of consensus analysts' dividend forecasts, earnings predictability and dividend policies of firms in 39 countries from 1995 to 2004. For firms that display stronger dividend smoothing, as modeled by Lintner [Lintner, J., 1956. Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review 46, 97–113], there is a lower correlation between dividend and earnings forecast errors, with less of the earnings uncertainty being passed into dividend uncertainty. The link between earnings and dividend forecast errors is weaker in common-law, capital market-based countries and in countries with well-developed financial (debt and equity) markets, where firm managers have greater incentives to smooth dividends and to use dividends for signaling.     

The dividend–price ratio does predict dividend growth: International evidence

Unpredictable dividend growth by the dividend–price ratio is considered a ‘stylized fact’ in post war US data. Using long-term annual data from the US and three European countries, we revisit this stylized fact, and we also report results on return predictability. We make two main contributions. First, we document that for the US, results for long-horizon predictability are crucially dependent on whether returns and dividend growth are measured in nominal or real terms, and this difference is due to long-term inflation being strongly negatively predictable by the dividend–price ratio. The impact of inflation is to reinforce real return predictability and to reduce – or change direction of – real dividend growth predictability. This provides an explanation for the strong predictability of long-horizon real returns in the ‘right’ direction, and the strong predictability of long-horizon real dividend growth in the ‘wrong’ direction, that we see in US post war data. Second, we find that predictability patterns in three European stock markets are in many ways different from what characterize the US stock market. In particular, in Sweden and Denmark dividend growth is strongly predictable by the dividend–price ratio in the ‘right’ direction while returns are not predictable. The results for the UK are mixed. Our results are robust to a number of changes in the modeling framework. We discuss the results for dividend growth predictability in terms of the ‘dividend smoothing hypothesis’.     

Executive compensation and dividend policy

This study examines the use of dividend provisions in executive compensation contracts to influence dividend policy. A sample is constructed with the largest companies in the oil and gas, defense/aerospace and food processing industries, where dividend-related agency costs are expected to be high. The results indicate that the existence of a dividend incentive in the compensation plan is positively associated with higher dividend payouts and yields, and higher annual changes in dividend levels. Evidence is also provided on firm characteristics associated with the use of a compensation contract with a dividend provision. The results are consistent with the theory that firms link compensation incentives to dividend payments to reduce conflicts between shareholders and management over dividend decisions.     

The composite dividend tax rate

Dividends often impose taxes on investors. However, as certain prior financial models indicate, they also can produce a tax gain from leverage. Hence the composite marginal dividend tax rate can be specified as the nominal rate minus the offsetting tax gain from leverage. Although this principle has been embedded in theoretical models for more than 40 years, no prior study has examined empirically whether the dividend-induced tax gain from leverage influences dividend policy. We address this empirical void and find dividends decrease in the nominal dividend tax rate and increase in the offsetting tax gain from leverage. In addition, we find the composite tax rate outperforms traditional measures in explaining dividend policy for our full sample of firms. Consistent with prior theory, we also find the composite rate varies in influence according to the financing source for a dividend.     

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.     

An international analysis of dividend smoothing

This study examines the extent to which agency-based models and asymmetric information theories explain dividend smoothing around the world. Tests on a cross-section of more than two thousand firms from twenty-four countries show that managers of firms with low market-to-book ratios and less cash engage in greater dividend smoothing. Further, firms with highly-concentrated ownership structure and strong corporate governance smooth dividends less. In addition, managers of firms in industries facing high levels of competition smooth dividends more. We also determine that the extent of legal protections provided to shareholders and the culture of the country in which the firm is incorporated, as well as tax regime, have additional explanatory power for dividend smoothing. Our results are most consistent with the simultaneous presence of agency and information asymmetry effects in the decision to smooth dividends.     

Are ex‐day dividend clientele effects dead? Dividend yield versus dividend size

We devise an approach to determine whether market microstructure or taxes influence ex-dividend behavior. We find that microstructure effects of automated limit order adjustments strongly influence ex-day prices for dividends less than or equal to a tick. For these dividends, after controlling for dividend size, we find no relation between price-drop-to-dividend ratio and dividend yield. For larger dividends, both microstructure and tax effects are found: Consistent with the microstructure story we find that between ticks, as dividend sizes increase (hence dividend yields increase), price-drop-to-dividend ratios decrease. However, consistent with the tax clientele hypothesis, when dividend size is fixed, a positive relation between price-drop-to-dividend ratio and yield is still seen.     

Interim dividend cuts and omissions in the UK

UK firms that cut or omit interim dividends during the period 1986–1993 are studied. Price reactions to cuts and omissions were found to be significantly negative and stronger for initial reductions. Future earnings variables were found to be predictable from interim dividend reductions. Gearing, company size and interim earnings change variables were found to have explanatory power for the decision to determine whether to cut or omit an interim dividend.     

Revisiting the corroboration effects of earnings and dividend announcements

Using a unique market setting in Hong Kong, where (i) all firms release earnings and dividend information in the same announcement; (ii) corporate transparency is low; (iii) dividend income is non‐taxable and (iv) corporate ownership is highly concentrated, we re‐examine the corroboration effects of earnings and dividends. We use the control firm approach to avoid the return estimation bias resulting from observation clustering. We also add in variables and use econometric procedure to control for the potential impacts of earnings management, special dividends and heteroskedasticity. Our findings show that there exists a corroboration effect between the jointly announced signals.     

The impact of government ownership on dividend policy in China

We investigate the impact of State ownership on Chinese corporate dividend policy. We find that Chinese firms' dividend payout rates respond fairly quickly to earnings changes, and the average actual payout ratio for Chinese firms falls between the payout ratios for emerging-market and developed firms. These results are consistent with the dividend policies of developing economies in general. We also find that dividend payouts among dividend-paying firms, and the likelihood that a firm will pay a dividend, are increasing in State ownership. Our findings are consistent with the State's need for cash flow as a partial motivation for continued State ownership of a significant portion of the corporate economy, and support the agency and tax clientele explanations for dividend policy.     

The market's perception of the information conveyed by dividend announcements

This paper tests whether the market perceives announced dividend changes to reflect information about current and/or future cash flows. The empirical relationship between dividend changes and earnings changes is inconclusive. Furthermore, there is no empirical evidence regarding the market's perception of managers' intentions in changing the level of dividends. By analyzing the price reaction of scores to an announced dividend change, we are able to isolate the effects of a short-term change and a long-term change. Our findings indicate that the market perceives dividend changes to reflect a long-term change in earnings.     

The abnormal return associated with consecutive dividend increases

Several studies conclude that dividend changes that are seemingly predictable on a calendar basis attract abnormal returns. We study the abnormal returns associated with consecutive dividend increases to understand this puzzle. We use regression techniques to study the relation between the number of consecutive dividend increases and the abnormal return associated with the events. Further, we study whether this relation is sensitive to firm characteristics by partitioning the regressions by the characteristics that influence the abnormal return. Our results show that the abnormal returns associated with consecutive dividend increases decline at a diminishing rate and they do not disappear, consistent with the puzzle. In addition, the decline in returns is slowest among firms that are unprofitable, small, or have high payouts. These findings suggest that the abnormal returns persist because firms that are not expected to continue a dividend-increase streak based on their characteristics do so, surprising the market and perpetuating the abnormal return.