Financial and Housing Wealth,Expenditures and the Dividend to Ownership

For a household, home ownership provides necessary shelter, potential investment returns associated with property appreciation and a hedge against increased housing related cash outlays. In addition to potential appreciation, individual households benefit over time from a housing dividend defined as the difference between the market rent for the individual household’s housing unit and the household’s actual house ownership costs. The purchase of a house can substantially fix a household’s recurring housing related expenditures and generates a hedge (implied housing dividend) that increases with ownership tenure. This expenditure hedge (dividend) to home ownership is documented using pooled, cross-year samples from the Consumer Expenditure Survey (CEX). The housing dividend delivers a non-trivial effect on household non-housing expenditures after controlling for housing value, housing equity, financial assets and income.     

USING DIVIDEND POLICY AND MANAGERIAL OWNERSHIP TO REDUCE AGENCY COSTS

In this study we examine dividends and chief executive officer (CEO) stock ownership as interrelated mechanisms that may be used to reduce agency costs. We find a significant nonmonotonic relation between dividend yield and CEO stock ownership. Our evidence shows that until the CEO becomes entrenched, increased executive stock ownership reduces agency costs and decreases dividend yield. Beyond that point, increased stock ownership increases dividend yield. Whether additional stock ownership can reduce agency costs depends upon the CEO's degree of control in the firm.     

Is dividend smoothing universal?: New insights from a comparative study of dividend policies in Hong Kong and the U.S.

In this paper, we develop new insights about the dynamics of corporate dividend policy by performing the natural experiment of comparing corporate dividend policies in Hong Kong and the U.S., two economies where the tax regime and equity ownership structure are significantly different. Our empirical results can be summarized as follows. First, a test of the Lintner model reveals that the extent of dividend smoothing by firms in Hong Kong is significantly less than those in the U.S. Second, the signaling effects of dividend changes on stock returns are stronger in the U.S. compared to those in Hong Kong. Third, our logit analysis of the determinants of dividend changes indicates that, while the lagged dividend yield significantly affects dividend changes in both countries in the same fashion, prior year stock returns have opposite effects on dividend changes in the two countries. Finally, the extent of dividend smoothing is not systematically related to blockholder equity ownership in either country. Overall, our results suggest that, compared to U.S. firms, Hong Kong firms pursue a more flexible dividend policy commensurate with earnings, and that the differences between the dividend policies of firms in the two countries are consistent with the signaling implications of the differences in the tax regime across the two countries.     

The role of cross-listing,foreign ownership and state ownership in dividend policy in an emerging market

In this paper, we investigate if dividend policy is influenced by ownership type. Within the dividend literature, dividends have a signaling role regarding agency costs, such that dividends may diminish insider conflicts (reduce free cash flow) or may be used to extract cash from firms (tunneling effect) – which could be predominant in emerging markets. We expect firms with foreign ownership and those that are listed in overseas markets to have different dividend policies and practices than those that are not, and firms with more state ownership and less individual ownership to be more likely to pay cash dividends and less likely to pay stock dividends. Using firms from an emerging economy (China), we examine whether these effects exist in corporate dividend policy and practice. We find that both foreign ownership and cross-listing have significant negative effects on cash dividends, consistent with the signaling effect and the notion of reduced tunneling activities for firms with the ability to raise capital from outside of China. Consistent with the tunneling effect, we find that firms with higher state ownership tend to pay higher cash dividends and lower stock dividends, while the opposite is true for public (individual) ownership. Further analysis shows that foreign ownership mediates the effect of state ownership on dividend policy. Our results have significant implications for researchers, investors, policy makers and regulators in emerging markets.     

The information content of cash dividend announcements in a unique environment

Due to its distinctive institutional background, Oman offers a valuable opportunity to examine stock price reactions to dividend announcements. In Oman, (1) there are no taxes on dividends and capital gains, (2) there is a high concentration of share ownership, (3) there is low corporate transparency, and (4) firms frequently change their dividends. Our results show that announcements of dividend increases are associated with increased stock prices, while announcements of dividend decreases cause decreases in stock prices. Firms that do not change their dividends experience insignificant negative returns. These results contradict tax-based signaling models, which argue that higher taxes on dividends relative to capital gains are a necessary condition for dividends to be informative.     

Market response to dividend change announcements: unregulated versus regulated US firms

This paper attempts to determine whether there is a significant difference in how the stock market responds to dividend change announcements of regulated (both utilities and financials) versus unregulated firms and, if so, which factors cause this difference. An analysis of dividend change announcements of US firms over the period 1962–2016 shows that the market response is larger for unregulated than for regulated firms, but this difference is statistically significant only for dividend increases (not for dividend decreases). Further, cross-sectional analysis indicates that, for dividend increases, the difference between regulated and unregulated firms increases with diffused ownership and informational asymmetry. When both these factors are controlled for, the difference between regulated and unregulated firms becomes statistically insignificant. Thus, the evidence suggests that the significant difference in market response to dividend increases of regulated versus unregulated firms can be explained by differences in diffused ownership and informational asymmetry. There seems to be no intrinsic difference between regulated and unregulated firms in the market response to dividend decreases.     

The Role of Interest Rates in Influencing Long-Run Homeownership Rates

As a stated policy objective, the U.S. Department of Housing and Urban Development (HUD) seeks to boost the national homeownership rate to 70 percent by 2006. To accomplish this goal, they estimate that 3.8 million additional families be added to the ranks of U.S. homeowners. Furthermore, HUD estimates that the homeownership gap between minority and nonminority families must be reduced by a full 15 percent. Many policy instruments—both targeted and otherwise—have been suggested to increase homeownership. These range from low downpayment loans, greater access to credit in underserved areas, and interest rates subsidies. However, little is know about the efficacy of these measures to raise long-term homeownership rates. In this analysis, we focus on the role of interest rates on homeownership rates and the housing stock. In particular, we provide a critical review of the literature on the relationship between housing and interest rates in contrast to other determinants of homeownership and changes in housing supply. We then present our own estimates of the influence of interest rates on homeownership and housing starts. We find that interest rates play little direct role in changing homeownership rates. While changes in interest rates may affect the timing of changes in tenure status from renter to owner, the long-run ownership rate appears independent of interest rates. We find housing starts are, however, sensitive to changes in the interest rate. This implies that housing supply, or at least the timing of changes in housing supply, is sensitive to interest rates. It is though this mechanism that the stock of owner-occupied housing expands, though household formation and immigration may leave the ownership rate unchanged. We conclude by discussing whether other instruments, such as low down payment loans and improved technology for assessment of credit risk, may potentially be better suited to increasing long-term homeownership rates.     

Equity ownership segregation, shareholder preferences, and dividend policy in China

We investigate how listed Chinese firms pay different types of dividend to satisfy shareholders, different dividend preferences shaped by institutional factors such as share tradability and asymmetrical taxation. We find that the cash dividend level is significantly and positively related to the proportion of non-publicly tradable shares and this relation is mainly driven by legal person shareholders' preferences for cash dividends. In contrast, the stock dividend level is significantly and positively associated with the proportion of publicly tradable shares. These findings provide an empirical rationale for the current reform on the segregation of equity ownership rights in China.     

State Ownership,Political Institutions,and Stock Price Informativeness: Evidence from Privatization

In this paper, we examine the relation between government ownership and stock price informativeness around the world. Using a sample of privatized firms from 41 countries between 1980 and 2012, we find strong and robust evidence that state ownership is associated with lower firm-level stock price variation, i.e., stock price informativeness. Furthermore, we find that the relation between state ownership and stock price informativeness depends on political institutions. In particular, the adverse effects of state ownership on stock price informativeness are more pronounced in countries with lower political rights (i.e., lower political constraints on the government).     

Foreign Ownership of Stocks and Long-run Interdependence Between National Housing and Stock Markets—Evidence from Finnish Data

Globalization of the financial markets may have undermined co-movement between stock and housing markets, at least in small open economies. This paper provides an empirical study on the long-term dynamic interrelation between stock and housing markets in a small open economy with special attention to the effect of foreign investors on the dynamics. The empirical findings, based on a quarterly dataset from Finland over 1970-2006, do not support the hypothesis of diminished co-movement between Finnish stock and housing markets after the abolishment of the foreign ownership restrictions of stocks in 1993. The markets still appear to be tightly interdependent in the long run. Nevertheless, the results suggest that the substantial growth in the foreign ownership of Finnish stocks induced a large and long-lasting deviation from the cointegrating long-run relation between stock and housing prices. The results also imply that diversification between stock and housing markets works the worse the longer the investment horizon is.     

Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut

We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after‐tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.     

Public pension fund ownership and firm performance

Equity ownership by public pension funds (PPFs) is widely used in the literature (see, e.g., Cremers and Nair 2005; Dittmar and Mahrt-Smith 2007) as a measure of the strength of shareholder monitoring/governance. This paper raises caution on such practices by illustrating an inverted-U shape relationship between PPF ownership and firms’ future performance, measured by stock returns and operating performance: during 1985–2005, future performance first increases, then declines in aggregate equity ownership by PPFs. Our results suggest that PPFs’ presence is consistent with shareholder value maximization when they have moderate influence on firm management, whereas excessive PPF ownership may facilitate PPF managers’ pursuits of political interests and destroy shareholder value. Therefore, it is important to impose an upper bound to PPF ownership when measuring the strength of shareholder monitoring/governance.     

Wealth redistributions or changes in firm value: An analysis of returns to bondholders and stockholders around dividend announcements

Past studies indicate that stock prices are affected by announcements of unexpected dividend changes, i.e., unexpectedly large dividends are associated with positive stock price response. Two explanations of this empirical regularity, ‘the information content hypothesis’ and the ‘wealth redistribution hypothesis’, imply different bond price behavior around dividend announcements. The information content hypothesis predicts a positive bond price response to unexpectedly large dividends, while the wealth redistribution hypothesis predicts the opposite. This paper distinguishes between the relative importance of the two hypotheses by empirically investigating bond price behavior around dividend announcements. The evidence presented is consistent with the information content hypothesis. However, the gains associated with positive information are captured by the stockholders, while the losses are shared with the bondholders.     

Does institutional ownership increase stock return volatility? Evidence from Vietnam

The literature on institutional ownership and stock return volatility often ignores small emerging countries. However, this issue is more profound, due to the large size of institutional investors and small stock market size, in emerging equity markets. This paper examines the effects of the institutional ownership on the firm-level volatility of stock returns in Vietnam. Our data cover most of non-financial firms listed on the Ho Chi Minh City stock exchange for the period 2006–2012. Employing different analysis techniques for panel data and controlling for possible endogeneity problems, our empirical results suggest that institutional investors stabilize the stock return volatility. Moreover, we document that: i) the stabilizing effect of institutional investor ownership is higher in dividend paying firms, and ii) if firms are paying out more dividends, this stabilizing effect is greater. Our results outline the important role of institutional investors in maintaining the stability in emerging stock markets.     

A Theory of Dividends Based on Tax Clienteles

This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce "ownership clientele" effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.     

Short selling around dividend announcements and ex-dividend days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally high short-selling activity prior to announced dividend decreases, which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that the common negative relation between current short selling and future daily returns prior to unfavorable dividend announcements is similar to the negative relation during non-event times, suggesting that dividend announcements do not provide unusual trading opportunities for informed traders (Gonedes, 1978, and Benartzi et al., 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that both the level of short selling and the return predictability of short selling is markedly higher on and after the ex-dividend day than during non-event times.     

Institutional ownership,volatility and dividends

We find that the sign of the correlation between institutional ownership and volatility depends on the firm’s dividend policy: institutional ownership is negatively (positively) related to volatility among non-dividend (dividend) paying stocks. The empirical results are consistent with an interaction between institutional preference for low volatility and the tendency of higher levels of institutional ownership to increase volatility through their trading behavior. This result is robust to many control variables and possible endogeneity concerns. Supporting our conjecture that institutions herd on dividend signals we find that the correlation between turnover and institutional ownership is higher for dividend paying stocks, and that the positive correlation between turnover and institutional ownership is higher on dividend declaration days. Finally, we also find that the level of institutional ownership drops following an increase in volatility for both dividend payers and non-payers, and that volatility rises following increased institutional ownership for dividend paying stocks.     

The Market Reaction to Discontinuing Regular Stock Dividends

This paper investigates the behavior of returns to share-holders of NYSE and AMEX firms that publicly announce the discontinuance of regular stock dividends. Using event-type methodology, the results show that the average abnormal return for NYSE and AMEX firms is negative but not statistically significant on the event date. Partitioning the sample by stock-related characteristics shows that for small firms with low stock prices and low institutional ownership, management's decision to drop regular stock dividends conveys a significantly negative signal, which, in turn, causes stock prices to decline. Firms that drop a stock payment and simultaneously initiate or increase cash dividends experience a significant increase in shareholder wealth. However, firms that drop the stock dividend policy and do not begin a cash dividend policy experience a sharp decline in shareholder wealth.     

Executive incentives and payout policy: Empirical evidence from Europe

We investigate how corporate payout policy is influenced by executive incentives, i.e. stock and option holdings, stock option deltas and stock-based pay-performance sensitivity for 1,650 publicly listed firms from the UK, Germany, France, Italy, the Netherlands and Spain, over the period from 2002 to 2009. Our results show that executive stock option holdings and stock option deltas are associated with lower dividend payments in our sample of European countries, where we do not observe any presence of dividend protection for executive stock options. We find that this relationship is mainly driven by exercisable stock options and by options that are in the money. Additionally, we observe that executive stock option holdings and stock option deltas have a negative impact on total payout, suggesting that executives do not substitute share repurchases for dividends. Furthermore, the fraction of share repurchases in total payout increases as executive stock option holdings and stock option deltas increase. Finally, our results show that executive share ownership and stock-based pay-performance sensitivity may mitigate agency conflicts by significantly increasing the level of total payout.     

Dividend sensitivity to economic factors,stock valuation,and long-run risk

In this paper, we develop a theoretical stock valuation model that takes into account the long-run sensitivity of dividends to various economic factors. Our valuation process integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in the literature). More precisely, we demonstrate that a stock’s long-run dividend growth is negatively related to its current dividend–price ratio and linearly related to N sensitivity coefficients, given by the long-run sensitivity between dividends and economic factors. Then, we show that the equilibrium price of a stock is a function of its current dividend, long-run dividend growth, and N risk parameters.