On the differential market reaction to dividend initiations

The finance literature documents substantial positive stock price reaction to dividend initiations. Most dividend initiation studies focus on the average positive reaction; however, 40 percent of the firms that initiate dividends experience negative abnormal returns at announcement. This paper focuses on the apparent heterogeneity in the stock price reaction to dividend initiation. I find that the observed negative market reaction reflects the market’s economic assessment of the impact of the event on these firms, and that it is not caused by anticipation or confounding events. The result is also supported by the fact that the market reaction to dividend initiation for these firms is negatively related to initial dividend yield. Both the positive and negative observed reactions are consistent with conventional arguments regarding the information content of dividends, and their role in mitigating agency problems.     

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.     

The pricing of dividend consistency

This study investigates the pricing of dividend consistency. The approach used is to study the announcement effects around significant dividend changes; specifically dividend omissions, resumptions, and increases or decreases of 25% or more. We focus on the relation between the magnitude of the announcement effect and the firm's history of dividend payment consistency using an ARIMA model. We find that dividend consistency is not priced.     

Credit ratings and long-term IPO performance

We examine the impact of credit ratings on long-term IPO pricing. Our findings suggest that the provision of credit ratings prior to IPO reduces information asymmetry and improves market efficiency. The increase in disclosure through credit ratings can reduce information risk and price discounts. IPOs with (without) credit ratings are less (more) underpriced and more positively (negatively) perceived by outside investors. The market reactions for rated IPOs are more immediate and more complete (as the result of improved transparency), while long-term performance is insignificant when information asymmetry is reduced.     

Diversification patterns and long-term corporate performance

This study examines the relationship between diversification patterns of corporations and their long-term performance. It is seen that the standard performance measures suggested in corporate finance literature rate all corporations equally in the long run regardless of their diversification strategies. This is because all corporations tend to earn a normal rate of return, given risk, for their shareholders in generally efficient capital markets. Since finance performance measures are not helpful in analyzing corporate performance, use of other measures is suggested for the purpose.     

LIFO adoption and dividend payout

Adoption of the LIFO inventory costing method tends to decrease reported earnings but increases cash flows to adopting firms. This study examines the change in dividend payout ratios (cash dividends divided by earnings) accompanying LIFO adoption. The question addressed is whether adopting firms likely paid out incremental cash flows or retained them to the benefit of management. The evidence suggests that managers and directors adjusted payout ratios to partially offset the negative earnings effect of LIFO. The adjustments made were not sufficient in magnitude to achieve a neutral LIFO effect on dividend payout, and the net result was the retention of incremental cash flows generated by LIFO adoption.     

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.     

ISO 9000/1994, ISO 9001/2000 and TQM: The performance debate revisited

The debate about the impact of ISO 9000/1994 on performance has been waging since its inception. While there is a general agreement regarding the positive impact of TQM on performance, there has been less agreement among the academics about the impact of ISO 9000/1994. Perhaps in response to such debate, the new ISO 9001/2000 has appeared purporting to be more in line with the TQM philosophy. As of now, how this 2000 version actually affects performance is yet to be explored. In this study, we compare the implementation of ISO 9000/1994 and ISO 9001/2000 as representing two different efforts to implement quality management practices. We evaluate its impact on company performance with a sample of 713 Spanish industrial companies. We also examine if the 2000 version of ISO is taking us closer to the implementation of TQM. Further, we depart from the past studies methodologically by considering performance as a formative construct rather than a reflective construct. Based on the mean and covariance structural (MACS) analyses, we conclude that ISO 9001/2000 certified companies do not perform noticeably better than ISO 9000/1994 or non-certified companies. However, we find that ISO 9001/2000 certified companies apply TQM at a higher level than ISO 9000/1994 certified companies, but whether they actually perform better is less clear.     

Human capital revisited: The role of experience and education when controlling for performance and cognitive skills

Human capital theory predicts that differences in wages arise because of differences in human capital. The latter can be accumulated in two ways: through experience and education. Using matched firm–worker data for the Ghanaian Manufacturing sector we first test whether changes in wages over the life cycle reflect changes in performance, following the methodology of Medoff and Abraham [Medoff, J.L., &; Abraham, K.G. (1980). Experience, Performance, and Earnings. Quarterly Journal of Economics, 95(4), 703-736; Medoff, J.L., &; Abraham, K.G. (1981). Are Those Paid More Really More Productive? The Case of Experience. Journal of Human Resources, 16(2), 186–216]. We find that wage–seniority profiles are independent of performance – a result that holds when controlling for firm fixed effects. Extending the analysis, we include a control for on-the-job-training and find that it does not attenuate the seniority profile, which is also at odds with human capital theory. We do find however that firm characteristics play an important role. Wage–seniority profiles are steeper in large firms, but performance profiles are not, suggesting that the results from Medoff and Abraham are specific to large firms. We then assess the role of education. Our results confirm that education is important for the allocation to job levels. Using data on cognitive ability, we also find that the effect of education on wages is at least partially because it signals cognitive ability. We also find evidence that the returns to education are not related to performance, while the returns to cognitive ability are.     

Innovation orientation and long-term performance: The mediating role of market perception capability

This paper examines the relationship between the orientation towards innovation of SMEs and long-term performance, considering market perception capability as a mediating variable. This research topic is important because it can provide a better understanding of the relationship between innovation orientation and performance, since most of the previous papers that have analyzed this relationship have done so from a short-term perspective. But the effect of innovation orientation on performance may not be immediate and short-term, but long-term, and may be influenced by the company’s ability to develop marketing capabilities. A sample of 77 independent hotels is taken for empirical contrast and a system of structural equations is modelled using the Partial Least Squares (PLS) technique. The results show that the company’s capacity to understand the market in which it operates functions as a mechanism that intervenes in the relationship between innovation orientation and long-term result, with a mediating effect that explains the positive effect of innovation orientation on the long-term results.

     

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.     

Agency costs and dividend payments: The case of bank holding companies

This paper examines the hypothesis that agency costs are a primary factor motivating dividend payments. Norohna et al. (1996) present evidence that the agency cost rationale is context specific and that dividends will not be driven by agency costs when other mechanisms exist for controlling agency problems. We argue that regulation of bank holding companies involves a context specific case where agency costs may be less relevant. Using an empirical methodology similar to Born and Rimbey’s (1993), we find that the abnormal returns associated with dividend announcements by bank holding companies are not related to their external financing activities. The monitoring activities of the capital markets are not a rationale for dividend payments in the presence of bank regulation. Our results are robust to an alternative explanation involving the signaling role of new equity financings.     

The effects of tax and regulatory changes on commercial bank dividend policy

The literature concerning the Tax Reform Act of 1986 (TRA) is extensive, but generally does not consider dividend policy changes related to TRA’s passage. One exception is Casey et al., but that work omits banking. An examination of banks is especially apt given TRA’s changes in tax rates and municipal bond categorization. Results show bank dividend policy to be different from other industries, as banks show no relation to past growth rates, beta, or an insider ownership as Rozeff’s model holds. The results support the idea that the lower the taxes, the higher the payout which is contrary to the dividend irrelevancy argument. However, the results are not robust in tests using data from a later period meant to more closely examine changing capitalization requirements’ impact on dividend policy.     

Long-term industry performance following IPOs

While firms are more likely to go public when the corresponding industry prospects are favorable, they may also serve as formidable threats to pull market share from the industry. In addition, if IPOs are timed when industry valuations are unusually high, there may be an aftermarket correction in the industry. We find that the corresponding industry rival portfolios experience unfavorable price performance on average over the 36-month period following an IPO. The dispersion in long-term industry effects following the IPOs can be partially explained by competitive effects and the timing of the IPO. The adverse industry effects are more pronounced when the IPOs are small, and when the IPO is the first in the industry within the last 2 years. Furthermore, the adverse industry effects are more pronounced when the IPOs are in regulated industries, and when prevailing industry multiples are relatively high at the time of the IPO. Overall, these characteristics document the influence of competitive effects and timing signals on industry effects associated with IPOs.     

The inflation-productivity trade-off revisited

Our aim in this paper is threefold. First, to test the robustness of the relation between total factor productivity growth and inflation to the specification of the estimating model; second, to test the stability of their relationship in the short run and in the long run, and third, to investigate the direction of causality between these two variables. To accomplish the first objective, we estimate a generalized Box–Cox cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964–1980. The results show that: (a) the acceleration of inflation from 1964–1972 to 1973–1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable, and (b) even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. With respect to the second objective, somewhat to our surprise, we find that the inflation-productivity trade-off prevails even in the long run. And, finally, regarding the third objective, it emerges that in the great majority of two-digit manufacturing industries the causality runs from inflation to productivity. On these grounds we conclude that for a precise estimation of the relationship under consideration it is imperative to sort out the three effects involved, do so by adopting the most general flexible functional form for the cost function, and run the appropriate stability and causality tests.

The deterrence hypothesis revisited

This study explores the causes of crime and the differences in deterrent effects of policing on crimes among rural, suburban, and urban communities. We hypothesize that certain numbers of all crimes are unaffected by policing due to their high net return; policing deters only marginal crimes. That is, unlike other research efforts, we recognize that there is a level of crime indigenous to a given type of community about which little can be done, although a particular community can affect deviations from this level. By introducing this ‘natural rate' of crime we are able to empirically reveal the deterrence effect of police expenditures upon all types of property crimes except robberies. The study analyzes 230 communities in a system of six simultaneous equations, using police, crime, and other socio-economic variables. The model can be used by state and regional policy-makers to more effectively allocate resources to the different types of communities under their jurisdiction and among the various police functions designed to deter specific types of crime.     

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.     

The effects of taxes and dividend policy on capital accumulation and macroeconomic behavior

This paper analyzes the macrodynamic effects of changes in various tax rates in an intertemporal optimizing framework. Two aspects emphasized include the role of dividend policy and the behavior of the stock market. Both permanent and temporary tax changes are considered, with the transitional adjustment paths being characterized in detail. The contrast between the short-run and long-run effects is highlighted. In particular, an increase in any of the tax rates will cause short-run employment to fall, and with the capital stock fixed instantaneously, the capital-labor ratio immediately rises. Over time, as the capital stock declines, the capital-labor ratio falls.     

The validity of instruments revisited

This paper shows how valid inferences can be made when an instrumental variable does not perfectly satisfy the orthogonality condition. When there is a mild violation of the orthogonality condition, the Anderson and Rubin (1949) test is oversized. In order to correct this problem, the fractionally resampled Anderson-Rubin test is derived by modifying Wu’s (1990) resampling technique. We select half of the sample when resampling and obtain valid but conservative critical values. Simulations show that our technique performs well even with moderate to large violation of exogeneity when there is a finite sample correction for the block size choice.     

Long-run stock performance following stock repurchases

Studies examining long-term performance after stock repurchases provide mixed results. I point out two substantive problems in samplings of early studies. First, we should distinguish whether or not firms actually repurchase shares following announcements of repurchase programs. Second, as some firms frequently announce repurchase programs, we should consider overlapping announcements during the performance estimation period to avoid any confounding effects. Using a sample that corrects for these problems and the calendar portfolio regression method, I find strong evidence that firms that announce repurchase programs infrequently and repurchase shares actually experience significant long-term abnormal returns. These findings provide an explanation of why some previous studies failed to find significant positive long-term performance.