Investment and financing choices by time-inconsistent managers

This paper provides an analytically tractable continuous-time model in which a time-inconsistent manager can divert part of the firm’s cash flows as private benefits at the expense of outside shareholders. We endogenously determine the investment scale, investment threshold, optimal coupon and default threshold under managerial discretion. We demonstrate that time-inconsistent managers each have a trade-off between the timing and scale of investment.Among a number of important implications, by exploring agency costs of equity as deviations from the investment and financing policies that maximize equity value, our analysis reveals that a certain degree of time inconsistency in managerial preferences decreases the agency costs of equity. We also find that a naive manager more severely distorts the investment and financing policies than does a sophisticated manager, which leads to higher agency costs of equity. Finally, we document that the impacts of corporate governance variables, such as the managers’ property parameter and/or the level of managers’ ownership, depend on the managers’ beliefs regarding their future time-inconsistent behavior; this prediction provides novel empirical tests.     

基于时间偏好不一致的最优关系租金与银企估值

基于时间偏好不一致性的理论框架,构建了银企合作的关系贷款模型,模型中银行的最优停贷决策被视为一项实物期权。数值结果表明,时间偏好不一致性会导致代理人选择更低的违约门槛,但借款人的融资成本会更高。在项目估值方面,相比时间偏好一致情形,具有时间偏好不一致特征的银行和企业项目价值都大幅减少。此外,幼稚型和成熟型代理人对比结果显示,幼稚型代理人的错误信念能够抑制由于时间偏好不一致而导致的违约风险上升,并且能够降低最优关系租金,从而减轻具有财务约束的企业的融资成本。构建的贷款模型不仅丰富了银企关系型借贷的相关理论研究,而且指出在代理人具有时间偏好不一致的条件下最优关系租金(融资成本)更高,这从行为金融的认知偏差角度为中小企业融资难、融资贵的困境提供了新的解释。     

Not paying dividends? A decomposition of the decline in dividend payers

Current payout policy literature contends that firms’ propensity to pay dividends declined between 1978 and 1998. Using the Oaxaca decomposition methodology, we measure changes in the propensity to pay dividends between 1978 and 1998. Results suggest that firms today have only a slightly lower propensity to pay dividends. Furthermore, when we also categorize firms that use stock repurchases as dividend payers, we find that 100% of the decline in the proportion of dividend payers can be explained by changes in firm characteristics only. The difference is that firms that firms are now repurchasing stock instead of paying dividends.     

Does having a semimandatory dividend policy enhance investor confidence? Research on dividend-financing behavior

Enhancing investor confidence is crucial for sustainable and stable development of the capital market. Does having a semimandatory policy to pay dividends help to enhance investor confidence? What is the origin of the cash dividend paid by companies to meet regulatory requirements so as to enhance investor confidence? Based on these considerations, this paper uses the exogenous policy shock that in 2006 the China Securities Regulatory Commission required listed companies to pay accumulated dividends of no less than 20 % of average annual distributable profits and adopts a panel difference-in-difference estimation strategy to explore whether this new policy has significantly enhanced investor confidence. In addition, it explores the source of external financing for cash dividends by examining dividend-financing behavior. The results show that the semimandatory dividend policy has led to new dividend-financing behavior by listed companies. The cash dividend paid by companies comes mainly from external financing, especially a net increase in debt. The paper expands the traditional theory of dividend payment and provides a reference point for decision-making by shareholders, company managers, and regulatory agencies.     

Optimal Dividend Payment Strategy under Stochastic Interest Force

This paper attempts to study the optimal dividend barrier strategy in risk analysis of an insurance company under stochastic discount interest. Based on stochastic perturbation methodology, we first describe the random of interest by Wiener Process and Poisson process and yield some theoretical results satisfied by optimal dividend barrier. In the case of an exponential individual claim distribution, a group of barrier values are obtained. Meanwhile we also discuss the effect of stochastic interest on the barrier by data analysis and direct interpretations about interest models. It is found that the barrier is more sensitive to constant interest force than other parameters in interest model and the effect of diffusion coefficient on barrier is less sensitive than that of Poisson coefficient. These all provide insights into the effect of stochastic interest on the optimal barrier, and show the importance of introducing stochastic interest. Finally, we propose several meaningful and follow-up problems, for example, changing the criterion of finding the optimal barrier and discussing under more extended risk models.     

Largest shareholder and dividend policy around the world

This paper examines the interaction between the largest shareholder and dividend policy in a sample of 8,279 listed firms drawn from 37 countries. We find that firms are more likely to pay dividends when profitability is high, debt is low, investment opportunities are limited or when the largest shareholder is not an insider. Further, the magnitude of dividend payout tends to be smaller when the largest shareholder is either an insider or a financial institution. It is also apparent that largest shareholding and dividend payout are related and that, consistent with the extant literature, legal system does matter in dividend policy decisions.     

投资者情绪、股利政策与公司价值研究

基于行为金融学背景对股利政策的信号传递作用进行的研究发现,在不同的投资者情绪条件下,股利政策信号传递的效应存在差异。在股市上涨时期,不同股利政策对投资者的投资决策的影响几乎没有显著差异;在股市下跌时期,现金股利成为投资者获得收益的主要来源,因此发放现金股利的公司受到市场追捧。因此,上市公司股利政策制定不仅要考虑自身情况,还需要考虑市场情绪。     

Revisiting managerial perspectives on dividend policy

We survey managers of Nasdaq firms that consistently pay cash dividends to determine their views about dividend policy, the relationship between dividend policy and value, and four common explanations for paying dividends. The evidence shows that managers stress the importance of maintaining dividend continuity and widely agree that changes in dividends affect firm value. Managers give the strongest support to a signaling explanation for paying dividends, weak to little support for the tax-preference and agency cost explanations, and no support to the bird-in-the-hand explanation. The study provides new evidence about how managers view dividend life cycles and residual dividend policy. The authors would like to thank two anonymous referees for helpful comments and suggestions, and Maheshan Fernando and Sumeet Chawla for providing research assistance.     

Democracy and dividend policy around the world

This paper investigates how democracy influences corporate dividend policy. With a sample of 228,628 observations from 37 countries, we find that democracy is negatively associated with both the likelihood to pay dividends and the payout ratio. Moreover, we document that this effect is stronger when shareholders (creditors) are weakly (strongly) protected. These findings imply that the effect of democracy on corporate dividend policy is transmitted mainly through democratic procedures. Besides, we find that democracy also negatively affects dividend initiations.     

Stock-market reaction to growth-induced dividend cuts: Are investors myopic?

This paper focuses on shareholder reaction to growth-motivated dividend cuts and omissions. The results reveal that although growth announcements mitigate the capital loss induced by dividend decreases, the stockmarket response to growth-oriented dividend cuts is still strongly negative. However, the capital loss suffered by investors is significantly reduced when dividend cuts are accompanied with stock dividends. Two potential explanations of the results are explored: (1) shareholders find the immediate benefits of stock dividends more attractive than the potentially higher future rewards of investment opportunities; and (2) shareholders overreact to dividend announcements. Analysis of the performance of the firms for two years following the dividend cut indicates weak support for the overreaction hypothesis.     

Optimal effort in the principal-agent problem with time-inconsistent preferences

This paper incorporates an agent’s time-inconsistent preferences into the Sannikov (2008) contract model to explore the effects of an agent’s preferences on his own behaviors: the incentive effort choice, the optimal retirement time and the consumption flow during his whole career life. We find the agent’s time inconsistency makes it difficult for him to be motivated and makes him need more compensation. An agent’s time-inconsistency erodes both the principal and his own income. The time-inconsistent agent will choose a lower incentive effort level, retire at an earlier time and have a lower consumption flow compared with his time-consistent peer. The time-inconsistent preference exactly influences the agents behavior and makes the agency problem more serious. Therefore, the firm has to cost more to stimulate such a time-inconsistent agent, which will damage the firms profits, as well as the efficiency.     

Demographics, dividend clienteles and the dividend premium

The catering theory of dividends proposed that corporate dividend policy is driven by prevailing investor demand for dividend payers, and that managers cater to investors by paying dividends when the dividend premium is high. While earlier research found that the dividend premium is not driven by traditional clienteles derived from market imperfections such as taxes, transaction costs, or institutional investment constraints, we find empirical evidence that demographic clienteles are an important source of the time-varying demand for dividend payers. In particular, we find that, as consistent with the behavioural life-cycle theory and the marginal opinion theory of stock price, the dividend premium is positively driven by demographic clientele variation represented by changes in the proportion of the older population. Our results are robust when controlled for the factors of investor sentiment, signalling, agency costs, tax clienteles, time trend, business cycle fluctuations and varying sample periods.     

Is corporate payout taxation a long run phenomenon? Evidence from international data

This paper examines whether dividend and capital gains taxation influences corporate payout policy using the country level data of 21 countries in panel versions of time series models. We find that dividend relative to capital gains tax penalty is cointegrated with corporate payouts (dividends and share repurchases) i.e. corporate payout taxation may be a long run phenomenon. Further, the cointegrating vector estimates are largely consistent with the traditional view of dividend taxation whereby the tax penalty discourages dividends, while the estimates give limited support to the premise that firms substitute dividends for share repurchases in response to an increase in dividend tax penalty. Long run causality also operates between the tax penalty and payouts in the error correction models. Additionally, dividend tax appears to be more influential than capital gains tax on dividend payout decisions. Lastly, taxation affects dividends more significantly in countries with high investor protection.     

The effect of takeover defenses on the dividend decision

Many firms have sought protection from hostile takeovers by passing defensive amendments to their corporate charter and/or lobbying their state legislatures for statutory protection. Agency theory would suggest that any such takeover defenses alter the principal-agent relationship. A consequence of such a change may be a change in corporate decision making. The objective of this research is to test the effect that passage of antitakeover amendments has on a firm's dividend policy. We use six alternate measures of dividend activity: total dividends paid, dividends per share and dividends relative to earnings, cash flow, market value, and book value. Our results indicate that firms that adopt antitakeover amendments, when compared to an industry control sample, tend to have a slower rate of growth in dividend payout as measured by the proxy variables. These results suggest that entrenchment is not a likely outcome of such amendments.     

Information content of unexpected dividends under a semi-mandatory dividend policy: An empirical study of China

We examine the information content of unexpected dividend changes under China’s unique semi-mandatory dividend policy, which requires firms to pay a minimum amount of cash dividends before they can undertake seasoned equity offerings (SEO). The cumulative abnormal returns (CARs) are significantly positive in response to unexpected dividend increase for non-SEO firms, but they are not significantly different from zero for SEO firms. For non-SEO firms, there is a significant positive relation between future earnings and unexpected dividend increases, but the relation is not significant for SEO firms. However, when considering additional refinancing costs for SEO firms caused by the mandatory dividend policy, higher dividend payments are associated with lower future earnings. Overall, our findings are consistent with both the dividend signaling theory and the negative effects of SEOs on a firm’s value.     

Mandatory dividend rules and the investment decision: The case of Chile

Chilean companies are forced by law to distribute at least 30% of their liquid profits. The purpose of this paper is to analyze whether this mandatory dividend rule has an impact on investment decisions. Based on accounting data and by using the discontinuous regression approach, our results show that there are no significant differences between the investment plans of Chilean companies that pay dividends and those that do not. Moreover, consistent with the signaling hypothesis, our results also show that firms with a greater probability of paying an excess dividend (above the minimum required by the law) are those with more investment opportunities and more financial constraints.     

Utility indifference valuation for jump risky assets

We discuss utility maximization problems with exponential preferences in an incomplete market where the risky asset dynamics is described by a pure jump process driven by two independent Poisson processes. This includes results on portfolio optimization under an additional European claim. Value processes of the optimal investment problems, optimal hedging strategies and the indifference price are represented in terms of solutions to backward stochastic equations driven by the Poisson martingales. Via a duality result, the solution to the dual problems is derived. In particular, an explicit expression for the density of the minimal martingale measure is provided. The Markovian case is also discussed. This includes either asset dynamics dependent on a pure jump stochastic factor or claims written on a correlated non tradable asset.     

Cross-listing in the U.S. and domestic investor protection

Using the change in ordinary dividend payout as a proxy for improved governance, we show that cross-listing in the U.S. is associated with enhanced protection for the minority ordinary shareholders of exchange-listed non-U.S. firms. These firms substitute dividends for enhanced governance. We find no such effect for Rule 144a Portal firms. Interestingly, we document evidence inconsistent with the legal bonding hypothesis for Level 1 OTC firms. We believe that their ability to pay lower dividends post-listing is primarily due to their ability to credibly commit to fair treatment of their minority investors, given their record for equitable treatment of their ordinary shareholders. They achieve this reputation by consistently paying out a sizable proportion of their earnings as dividends. In addition, we find that the firm-level governance of Level 1 OTC firms, as measured by the number of closely held shares improves in the post-listing period. We find no such effect for SEC Rule 144a traded firms. Our results have also important implications for the agency models of dividends.     

Equivalent representations of non-exponential discounting models

I characterize the entire class of consumption rules for finite-horizon models in which consumption is proportional to lifetime wealth. Any such rule can be obtained from a preference model with CRRA period utility. In a steady state with constant interest rates, a proportional consumption rule can be derived from a model with time-consistent preferences or from a model with possibly time-inconsistent preferences in which a household continually reoptimizes future utility discounted relative to the present instant. These two preference models will only coincide for the special case when the discount function is exponential. More generally, there will be two distinct yet observationally equivalent preference models. Hyperbolic-like discounting may arise because that is a simpler way for the brain to process a standard exponential discount function after accounting for mortality risk.     

The effect of board independence on dividend payouts: A quasi-natural experiment

Motivated by agency theory, we investigate the effect of board independence on dividend policy. We exploit as a quasi-natural experiment the passage of the Sarbanes-Oxley Act and the associated exchange listing requirement, mandating firms to have a majority of independent directors. Our difference-in-difference estimates show that firms forced to raise board independence are significantly more likely to pay dividends than firms not required to change board independence. Our results are consistent with the notion that stronger board independence forces managers to disgorge more cash to shareholders, thereby reducing what is left for possible expropriation by opportunistic managers. Based on an exogenous regulatory shock, our results are more likely to show a casual effect, rather than merely an association.