Dividend reductions,the timing of dividend payments and information content

Australian companies pay dividends semi-annually with smaller “interim” payments and larger “final” payments. Interim dividends are declared and paid within a less full information environment than final dividends. We analyze the interactions between the timing of dividends and their information content, controlling for share repurchase and tax effects. Dividend reductions that are not associated with share repurchases are statistically significantly related to future abnormal earnings and provide strong support for the information content of dividend reductions. The percentage of dividend reduction is stronger for interim than for final dividend reductions. The market reaction is negatively related to the reduction in imputation tax credit and reacts more aggressively and negatively to interim as compared to final dividend reductions.     

金融危机对公司现金股利政策的影响研究——基于股权结构的视角

论文分析了金融危机对上市公司现金股利政策的影响。研究发现,在金融危机期间,上市公司会降低现金股利支付水平,以应对未来的不确定性。但是,相比非流通股比率低的公司,非流通股比率高的公司在金融危机期间更有可能支付更多的现金股利,以满足非流通股股东对于现金的需求。研究还发现,如果公司在金融危机期间发放现金股利,则市场反应更积极,这说明公司通过股利政策向市场传递了积极的信号。但是,非流通股比率高的公司支付现金股利的市场反应要显著小于非流通股比率低的公司,这可能是市场担心非流通股股东利用现金股利侵害中小股东利益。本文研究结论为完善上市公司的现金股利政策和保护中小投资者利益提供了现实启示。     

The Dividend Substitution Hypothesis: Australian Evidence

In a perfect capital market firms are indifferent to either dividends or repurchases as payout mechanisms, suggesting that the two payout methods should be perfect substitutes. Empirical research at the single country level, as well as cross country studies, provide evidence that dividends and repurchases act as substitutes (the dividend substitution hypothesis), and that the tax treatment of dividends versus capital gains affects this relation. Australia, which operates under a full dividend imputation system, has two types of repurchases: on‐ and off‐market. On‐market repurchases are taxed as capital gains while off‐market repurchases comprise a large dividend component carrying valuable tax credits. Australia thus provides a natural setting to investigate how the tax treatment of proceeds affects the dividend substitution hypothesis. Dividend substitution is found to exist for on‐market repurchases but not for off‐market repurchases, thus providing further support for the idea that the tax treatment of proceeds affects the substitutability of repurchases and dividends.     

Dividend Policies of Privately Held Companies: Stand‐Alone and Group Companies in Belgium

This study examines the dividend policies of privately held Belgian companies, differentiating between stand‐alone companies and those affiliated with a business group. We find that privately held companies typically do not pay dividends. Compared to public companies, they are less likely to pay dividends and they have lower dividend payouts. Our results also suggest that group companies pay more dividends than stand‐alone companies, consistent with the hypothesis that tax‐exempt group firms redistribute dividend payments on the group's internal capital market. Group companies pay higher dividends if they have minority shareholders.     

Why companies do not pay cash dividends: The Turkish experience

This study uses a survey approach to examine the views of corporate managers of non-dividend-paying firms listed on the Borsa Istanbul (BIST) in order to identify the factors leading to the decision not to pay cash dividends in Turkey. Our survey results show that cash constraints, growth opportunities, low profitability and earnings, and the cost of raising external funds (debt) are the major reasons inducing BIST firms not to pay dividends. Additionally, non-dividend-paying firms consider their shareholder preferences when setting a policy of paying no cash dividends. Yet, they neither view taxes as an important factor for paying no dividends nor perceive that stock repurchases are substitutes for cash dividends. Statistical analysis using secondary data of publicly-traded BIST firms reveals whether the actual corporate actions are consistent with the managerial views revealed by our survey research. These tests show that growth opportunities and debt level have a negative effect on the dividend payment decisions of BIST firms. Also, large blockholders and the existence of multiple large shareholders reduce the likelihood and intensity of paying a cash dividend in the Turkish market. Overall, the evidence suggests that non-dividend-paying companies are likely to be smaller in size, relatively younger (in the earlier stage of their life cycle) with high-growth opportunities or with a low level of profitability (or even loss) and small (negative) earnings. By contrast, highly-profitable, mature and large-size corporations are more likely to pay cash dividends.     

The Association Between Dividends and Accruals Quality

This paper responds to a specific gap identified in the prior literature by examining whether dividend paying status and dividend size are associated with accruals quality, using three accruals‐based earnings quality proxies on a large sample of 2387 firm‐year observations over 17 years in a developing economy, South Africa. Univariate tests are also conducted to identify differences in characteristics between dividend and non‐dividend paying firms, and large and small dividend paying firms. The paper finds that dividend paying status is positively associated with accruals quality. This association remains robust over sub‐groups of firms that differ in size, growth, profitability, age, maturity, leverage, capital intensity and propensity to raise new capital. The prior literature is extended by using quintiles of dividend size to further investigate the association between dividend size and accruals quality. The findings include that larger dividend paying firms are associated with better accruals quality, and that this relationship is stronger among firms that pay average‐sized dividends. Additionally, there are significant differences in characteristics between dividend and non‐dividend paying firms and between large and small dividend paying firms. Based on these results, policymakers, regulators, legislators and boards may want to explore the use of dividend policy as a corporate governance mechanism.     

Strategies and dividend imputation: the effect of foreign and domestic ownership on average effective tax rates

This study examines how dividend imputation affects the incentive of New Zealand firms to minimize tax. By effectively eliminating double taxation on company income, imputation reduces firms’ incentives to engage in costly tax minimization strategies. Before September 1993, resident and nonresident shareholders were treated differently under New Zealand’s imputation system. Because imputation credits cannot be passed to shareholders unless dividends are paid, we expect firms to pursue different tax paying strategies depending on their level of foreign ownership and their dividend payout ratios. After September 1993 when imputation credits were extended to nonresident portfolio shareholders, we expect that firms with high foreign ownership and high dividend payouts would have less incentive to minimize tax. Our results provide some support for these expectations.     

Are fewer firms paying more dividends?: The international evidence

This study examines aggregate patterns of dividends and earnings for the two largest equity markets outside of the U.S. over 1990–2001. Although aggregate U.K. and Japanese dividends exhibit modest increases, neither the magnitude nor the trend is comparable to the U.S. experience. Further, we note important differences in the level of aggregate dividends between keiretsu, independent and hybrid firms. This suggests the importance of corporate organizational form in understanding Japanese dividend behavior over time. We find evidence of dividend concentration in the U.K., but not in Japan. Fewer firms are paying more dividends, but not everywhere. We find evidence of earnings concentration in the U.K., but such consolidation in Japan is limited to independent firms. Our analysis offers mixed results for the relation between a firm's earnings and its ability to pay dividends. Few U.K. firms with negative earnings pay dividends while 73% of comparable Japanese firms do. The U.K. economy rather than the Japanese, increasingly resembles a two-tier system with a small set of very high earners providing a disproportional percentage of aggregate dividends. Finally, our evidence suggests that the general stability of Japanese and U.K. payout practices is inconsistent with a reduced propensity to pay dividends.     

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.     

Corporate payout policy in Australia and a test of the life‐cycle theory

We provide evidence on the frequency and size of payouts by Australian firms, and test whether the life‐cycle theory explains Australian corporate payout policies. Regular dividends remain the most popular mechanism for distributing cash to shareholders, despite a slight decline in the proportion of dividend payers since the relaxation of buyback regulations in 1998. Off‐market share buybacks return the largest amount of cash to shareholders. Dividend paying firms are larger, more profitable and have less growth options that nondividend paying firms. Consistent with the life‐cycle theory, we observe a highly significant relation between the decision to pay regular dividends and the proportion of shareholders’ equity that is earned rather than contributed.     

金融发展影响了公司成熟度与现金股利政策的关系吗?

选取留存收益股权比反映公司成熟度,研究不同金融发展水平下,公司成熟度与现金股利的关系,实证结果显示,伴随公司成熟度的提高,公司实施积极现金股利政策的动机会显著提升;金融发展在提高公司成熟度与现金股利支付倾向正向关系的同时,由于提供更多的投资机会,却弱化了公司成熟度与现金股利支付水平的正向关系。进一步研究发现,金融发展水平的提升能够推迟成熟公司首次对外支付现金股利的时机;其对公司成熟度与现金股利政策关系的影响作用主要源于金融发展的"治理效应"路径;将金融发展分为信贷市场发展和股权市场发展,发现与信贷市场促进公司成熟度与现金股利支付倾向正相关关系不同,股权市场抑制了公司成熟度与现金股利支付倾向及支付水平的正相关关系。     

Are Dividends Disappearing or Shrinking? Evidence from the Istanbul Stock Exchange

This paper examines the dividend payment decision of publicly owned firms listed on the Istanbul Stock Exchange (ISE) from 1991 through 2006. There is a decline in the percentage of net dividend payers, accompanied by a decline in the aggregate level of net real dividends paid. Contrary to the situation in developed markets, earnings and dividends concentration have declined over the sample period. The first mandatory dividend payment regulation pushed some firms to collect the distributed dividends back through rights issues and this resulted in low net dividend payments. One of the striking findings of this paper reveals that a majority of ISE firms prefer dividend omissions rather than dividend reductions. Once a firm keeps paying dividends, it puts much effort into increasing dividend payments rather than reducing them. Further, dividend payment and reduction decisions are affected by the current earnings of the firm and financial crisis significantly explains both the dividend payment and dividend reduction decisions.     

Dividend valuation,trading and transactions costs: the 1997 partial abolition of dividend tax credit repayments

Although UK resident tax-exempt shareholders lost the right to repayment of tax credits on dividends paid by UK resident companies in July 1997, they could continue to receive tax credit repayments in respect of dividends received from Irish resident companies until December 1998. In July 1997 the rate of tax credit on Irish companies' dividends was 21%, and this was reduced to 11% in December 1997. We obtain insights into the incentives and behaviour of UK tax-exempt investors in response to these changes in the relative ‘tax attractiveness’ of investments in Irish resident companies. We find that only at its highest rate, 21%, was the level of dividend tax credit on Irish companies' dividends sufficient to induce changes in UK tax-exempt shareholders' investment strategies; and that the propensity for dividend capture by tax-exempt investors is heightened when the dividend tax credit yield is of the order of 0.8 or more and dividend yield is of the order of 2.6% or more.     

Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation

We examine whether the agency cost arising from shareholder‐bondholder conflict is an important determinant of the timing of dividend reduction decisions. Firms forced to reduce dividends owing to bond covenant violations experience lower earnings, more frequent losses, and greater earnings declines around the dividend reduction year than do firms that voluntarily reduce dividends. Relative to voluntary‐reduction firms, forced‐reduction firms have higher debt‐to‐equity ratios and managerial holdings. These findings coupled with the increased dividend payout ratios and lower announcement period returns suggest that financially distressed firms that anticipate poor performance have greater incentives to delay reducing dividends to avoid a wealth transfer to bondholders.     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.     

Dividend policy and permanence of earnings

We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not. Using a sample of 337 firms over the 40 year period from 1950–1989, we find the data to be strongly consistent with the permanent earnings model. We also find that the data are more consistent with a model that relates dividend and earnings changes rather than levels. Thus, we conclude that earnings and dividends are not co-integrated. This contrasts with the implicitly co-integrated (levels) dividend model of Lintner (1956), and indicates that factors other than the permanent component of earnings, such as tax policy, clientele effects, transaction costs, etc. may have a significant impact on the long-run behavior of dividends.     

The Effect of Past Earnings and Dividend Patterns on the Information Content of Dividends When Earnings Are Reduced

This study pursues two objectives: first, to provide evidence on the information content of dividend policy, conditional on past earnings and dividend patterns prior to an annual earnings decline; second, to examine the effect of the magnitude of low earnings realizations on dividend policy when firms have more‐or‐less established dividend payouts. The information content of dividend policy for firms that incur earnings reductions following long patterns of positive earnings and dividends has been examined ( DeAngelo et al., 1992, 1996 ; Charitou, 2000 ). No research has examined the association between the informativeness of dividend policy changes in the event of an earnings drop, relative to varying patterns of past earnings and dividends. Our dataset consists of 4,873 U.S. firm‐year observations over the period 1986–2005. Our evidence supports the hypotheses that, among earnings‐reducing or loss firms, longer patterns of past earnings and dividends: (a) strengthen the information conveyed by dividends regarding future earnings, and (b) enhance the role of the magnitude of low earnings realizations in explaining dividend policy decisions, in that earnings hold more information content that explains the likelihood of dividend cuts the longer the past earnings and dividend patterns. Both results stem from the stylized facts that managers aim to maintain consistency with respect to historic payout policy, being reluctant to proceed with dividend reductions, and that this reluctance is higher the more established is the historic payout policy.     

What do dividends tell us about earnings quality?

Over the past 30 years, there have been significant changes in the distribution of earnings—cross-sectional variation has increased, with increasing left skewness—as well as in corporate payout policy, with many fewer firms paying dividends and the emergence of stock repurchases. We investigate whether the informativeness of payout policy with respect to earnings quality changes over this period. We find that the reported earnings of dividend-paying firms are more persistent than those of other firms and that this relation is remarkably stable over time. We also find that dividend payers are less likely to report losses and those losses that they do report tend to be transitory losses driven by special items. These results do not hold as strongly for stock repurchases, consistent with them representing less of a commitment than dividends.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Cross-Border Investing with Tax Arbitrage: The Case of German Dividend Tax Credits

German dividends typically carry a tax credit which makes thedividend worth 42.86% more to a taxable German shareholder thanto a tax-exempt or foreign shareholder. This results in a penaltyfor foreign investors who buy and hold German dividend-payingstocks. I document that, as a result of the credit, the ex-daydrop exceeds the dividend by more than one-half of the tax credit,and show that futures and option prices embed more than one-halfof the tax credit. The existence of the credit creates opportunitiesfor cross-border tax arbitrage—in which foreign holdersof German stock transfer the dividend to German shareholders—andimplies that it is tax efficient for foreign investors to holdderivatives rather than investing directly in German stocks.The empirical findings are consistent with costly tax arbitrageactivity by German investors, who face tax risk due to antiarbitragerules. Since dividend tax credits exist in many other countries,the findings are potentially of broad interest.