Dividend commitment in firm bylaws and capital structure change

Dividend policies can predict changes in capital structure. We focus on a unique setting, namely, dividend commitment emerging from a new dividend policy in China, and explore its relation to leverage. We find a commitment to increase dividends is associated with a subsequent reduction in leverage, and this negative relation is enhanced in firms without preliminary conditions specified for their commitments or with greater dividend smoothing in previous periods. Robustness tests support the main findings. Further analysis addresses four internal mechanisms that play essential roles in the above link, and we provide further details about how leverage is reduced.     

Social capital and payout policies

In this paper, we investigate the relationship between regional social capital and corporate payout policies. Using a large sample of US data, we find a positive relationship between regional social capital and both the likelihood and the amount of cash dividend payouts. However, we find that social capital has no bearing on the likelihood and amount of stock repurchases. The results from additional analyses show that the relationship between social capital and dividends is more pronounced for less geographically dispersed firms. We also find that the network component of social capital has a greater effect on dividends than the social norm component. Our results are robust to alternative specifications of dividends and social capital and to the use of a two-stage least squares (2SLS) analysis to alleviate endogeneity concerns. Overall, we document that regional social capital plays an important role in influencing cash dividend payout policies.     

AN ANALYSIS OF SHAREHOLDER REACTION TO DIVIDEND CUTS AND OMISSIONS

In this paper the proposition is tested that stock market reaction to a dividend change is a function of its information content. A multiple regression model is formulated to identify the factors that contribute significantly to the capital loss suffered by shareholders when firms decide to cut/omit dividends. Results indicate that, in conformity with the information content hypothesis, the announcement period capital loss induced by a dividend deduction significantly depends on the percentage change in dividends, the size and risk of the firm, and the price performance of the firm's stock in the immediately preceding period. The results further reveal that (1) simultaneous announcements of poor earnings cause larger capital losses; (2) prior announcements of loss/lower earnings, strikes, etc. attenuate the negative impact of dividend cuts; (3) managerial reassurances that the dividend reduction is growth-motivated produces a weakly favorable effect, and (4) institution of stock dividends concurrently with the dividend cut significantly reduces the negative valuation effect. It is concluded from the evidence that stock market reaction to managerial signals is a function of the perceived costs associated with these signals.     

Signaling, investment opportunities, and dividend announcements

This article examines potential explanations for the wealtheffects surrounding dividend change announcements. We find thatnew information concerning managers' investment policies isnot revealed at the time of the dividend announcement. We alsofind that dividend increases (decreases) are associated withsubsequent significant increases (decreases) in capital expendituresover the three years following the dividend change, and thatdividend change announcements are associated with revisionsin analysts' forecasts of current earnings. These results areconsistent with the cash flow signaling hypothesis rather thanthe free cash flow hypothesis as an explanation for the observedstock price reactions to dividend change announcements.     

Perceptions of corporate corruption culture and debt contracting

We find that the perception of corporate corruption culture in the top executive team affects both pricing and non-pricing loan provisions. Firms with higher levels of perceived corruption culture face higher interest spreads and are more likely to receive a collateral requirement. The bank syndicate is larger and more performance-based covenants and managerial negative restrictions (e.g., limits on capital expenditures or dividend restrictions) are put in place in loans made to firms with higher levels of perceived executive-based corruption. We further find that cultural proximity between lenders and borrowers mitigates the perceived corruption effects significantly, leading to contracts that are less costly and less restrictive. Additional tests suggest that lenders display an in-group bias in favor of culturally proximate borrowers.     

Agency costs and tax planning when the government is a major Shareholder

In state owned enterprises (SOEs), taxes are a dividend to the controlling shareholder, the state, but a cost to other shareholders. We examine publicly traded firms in China and find significantly lower tax avoidance by SOEs relative to non-SOEs. The differences are pronounced for locally versus centrally-owned SOEs and during the year of SOE term performance evaluations. We link our results to managerial incentives through promotion tests, finding that higher SOE tax rates are associated with higher promotion frequencies of SOE managers. Our results suggest managerial incentives and tax reporting are conditional on the ownership structure of the firm.     

Managerial risk-reducing incentives and social and exchange capital

This study investigates the impact of managerial risk-reducing incentives on the firm's social and exchange capital. Using CEO inside debt holdings to proxy for the incentives of risk-averse managers, we find that CEOs with more inside debt holdings are likely to invest more in building social capital, which targets broader society and potentially offers anti-risk protection advantages, to shield the value of their inside debt. However, our results further show that managerial risk-reducing incentives have no impact on firms' exchange capital, suggesting the need to recognize the difference between social and exchange capital. These findings corroborate the view that CEOs invest in social capital as a risk management strategy. Furthermore, this paper presents an understanding of the role that institutional investors play in moderating the impact of managerial risk-reducing incentives on social capital. Our results suggest that institutional investors constrain CEOs that have greater inside debt incentives from investing in social capital. However, they are still willing to increase the investment in social capital for risk management purposes when firm risk is high.     

Direct evidence of dividend tax clienteles

The paper is the first to evaluate the dividend tax clientele hypothesis using a data set of all domestic stock portfolios in the market. We find that investment funds that face a higher effective tax rate on dividend income than on capital gains tilt their portfolios away from dividend-paying stocks. These investors consequently earn a dividend yield that is about 35 basis points lower than that of investors who are tax neutral between dividends and capital gains (pension funds, unit-linked insurance, life insurance). Consistent with tax rules and charter provisions, we also find that private corporations prefer growth stocks, that foundations exhibit strong dividend preferences, and that partnerships rarely hold stocks portfolios.     

Managerial entrenchment and payout policy: A catering effect

Agency theory suggests that entrenched managers are less likely to pay dividends. However, according to the catering theory, external pressures from investors can force managers to increase dividend payments. Hence, we test whether entrenched managers respond to investor demand for dividends and share repurchases. Using a large sample of 9677 US firms over the period 1990–2016 (i.e. a total of 80,478 firm-year observations), we test and find evidence that managerial entrenchment negatively impacts dividend payments. Our findings suggest that catering effects weaken the negative impact of managerial entrenchment on payout policy and that in firms with entrenched managers an increase in the propensity to pay dividends is conspicuous only when there is external investor demand for dividends. Our results indicate that while insiders and institutional owners might not necessarily favour dividend payments, firms respond to catering incentives when dominated by insiders but not institutional owners. Overall, our findings are consistent with the view that dividend payments are a result of external pressures to reduce agency problems associated with firms run by entrenched managers.     

Dividend Taxes and Implied Cost of Equity Capital

We estimate firm‐level implied cost of equity capital based on recent advances in accounting and finance research and examine the effect of dividend taxes on the cost of equity capital. We investigate whether dividend taxes affect firms' cost of capital by testing the relation between the implied cost of equity capital and a measure of the tax‐penalized portion of dividend yield, which we define as the product of dividend yield and the dividend tax penalty. The results generally support the dividend tax capitalization hypothesis. We find a positive relation between the implied cost of equity capital and the tax‐penalized portion of dividend yield that is decreasing in aggregate institutional ownership, our proxy for tax‐advantaged investors. The evidence in this study adds to the understanding of the effect of investor‐level taxes on equity value.     

Dividend changes and catering incentives

We extend Baker and Wurgler's [2004a. Journal of Finance 59 1125–1165] catering theory to include decreases and increases in existing dividends. Consistent with our extended model, we find that the decision to change the dividend and the magnitude of the change depend on the premium that the capital market places on dividends. We also find that the stock market reaction to dividend changes depends on the dividend premium. Thus, the capital market rewards managers for considering investor demand for dividends when making decisions about the level of dividends.     

Managerial Ownership and Agency Conflicts: A Nonlinear Simultaneous Equation Analysis of Managerial Ownership, Risk Taking, Debt Policy, and Dividend Policy

This paper uses a nonlinear simultaneous equation methodology to examine how managerial ownership relates to risk taking, debt policy, and dividend policy. The results have implications for our understanding of agency costs. We find risk to be a significant and positive determinant of the level of managerial ownership while managerial ownership is also a significant and positive determinant of the level of risk. The result supports the argument that managerial ownership helps to resolve the agency conflicts between external stockholders and managers but at the expense of exacerbating the agency conflict between stockholders and bondholders. We further observe evidence of substitution-monitoring effects between managerial ownership and debt policy, between managerial ownership and dividend policy, and between managerial ownership and institutional ownership.     

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.     

EXTRAORDINARY ITEMS AND INCOME SMOOTHING: A POSITIVE ACCOUNTING APPROACH

This is an empirical study of single-period income smoothing which uses an incentives-based model to explain classificatory choices. An index is constructed to measure the smoothing effect of these choices. Weighted least squares regression results indicate that classificatory choices consistent with smoothing are more likely to be observed in firms with high earnings variability, high dividend payout, substantial managerial holdings of share options and diffuse share ownership. The existence of material scope for smoothing strengthens these findings. The model as a whole is statistically significant and, although the proportion of variability in smoothing explained is modest, it compares very favourably with other accounting choice studies. The relationship between smoothing and alternative earnings management strategies, including big bath accounting, is explored.     

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.     

Taxes,dividend yields and returns in the UK equity market

The higher rate of taxation on dividend income relative to capital gains has been offered as an explanation for the positive relation between stock returns and dividend yields among US firms. In the UK the relative tax rates are the reverse of those in the US. Thus, UK data provides an independent test of the tax-based approach to explaining the relation between stock returns and dividend yields. We find that high yielding stocks earn positive risk adjusted returns, whereas low yielding stocks earn negative risk adjusted returns. We also detect evidence of non-linearity in the performance of zero-dividend stocks. Controlling for firm size, seasonality and market risk we find a significant positive relation between dividend yields and returns. We conclude that the evidence is inconsistent with a tax-based explanation.     

Dividend policy and the global financial crisis: empirical evidence from the Italian insurance industry

The financial crisis has led to controversial discussions about the capital base of the insurance industry. Dividend cuts and capital increases have been suggested to counter diminishing equity. However, some observers seem to fear that investors could interpret a reduction of dividends as a sign for future problems. The empirical evidence from the Italian insurance sector reported here does indeed indicate that dividend smoothing is a relevant economic phenomenon. Therefore, Italian insurance companies should rethink dividend policy rather carefully due to the possible negative consequences of dividend cuts.     

Managerial Social Capital and Financial Development: A Cross‐Country Analysis

This study examines the issue of whether managerial social capital, defined as aggregate benefits of social obligations and informal contacts formed through social networks, has an impact on financial development. Utilizing a large cross‐country sample for the period 1999–2012, we provide evidence that higher levels of social capital have a positive effect on financial development. We are able to examine different types of social connections for our sample firms and find that informal and nonprofessional relationships matter the most for financial market development. These findings are robust to alternative model specifications, variable measurement, and estimation techniques.     

Why do CEOs agree to the discipline of dividends?

This study investigates dividend initiation as the product of the imbalance of power between shareholders and management in U.S. firms from 2003 to 2012. We find that dividend initiation is associated with a stronger governance structure (strong shareholders' rights and board independence), in accordance with the outcome model. We do not identify a single motivation for dividend initiation. Dividend-initiating firms tend to rely on various forms of governance balanced by the interests and ownership of CEOs and directors. Firms with institutional owners are more likely to initiate dividends concurrent with the turnover of the CEO. Dual CEOs initiate dividends when they own more shares, and boards of directors initiate dividends with a higher personal ownership stake when shareholders' rights are weak. We also find that when initiation is due to stronger governance, it is significantly related to the firm's investment opportunities, while for weak governance firms, that relationship is not observed. We interpret this as evidence that, under weaker governance, the decision to initiate dividends is motivated by agency conflicts rather than investment or capital structure considerations.     

Share Repurchases,Dividends and Executive Options: the Effect of Dividend Protection

We study the determinants of share repurchases and dividends in Finland. We find that higher foreign ownership serves as a determinant of share repurchases and suggest that this is explained by the different tax treatment of foreign and domestic investors. Further, we also find support for the signalling and agency cost hypotheses for cash distributions. The fact that 41% of the option programmes in our sample are dividend protected allows us to test more directly the ‘substitution/managerial wealth’ hypothesis for the choice of distribution method. When options are dividend protected, the relationship between dividend distributions and the scope of the options programme turns to a significantly positive one instead of the negative one documented in US data.