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.     

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.     

Fictitious dividend cuts in the CRSP data

We compare CRSP dividend data to data from firms' financial statements in the SEC's EDGAR database. Data screens typically used in the extant literature produce a sample in which about half of the apparent reductions in dividends per share are not actually dividend cuts. Many of the fictitious cuts are due to CRSP misclassifying special dividends as regular dividends. We demonstrate that the fictitious cuts can affect point estimates and inferences in studies of the information content of dividends. We provide a simple filter that eliminates most of the fictitious cuts in our sample – remove dividend cuts from the sample that are preceded by a dividend increase in the prior quarter. This filter produces empirical results that are similar to our sample of true cuts.     

Option Implied Dividends Predict Dividend Cuts: Evidence from the Financial Crisis

We employ the forward‐looking implied dividend information contained in option prices to predict dividend cuts and omissions during the recent financial crisis. The large number of dividend cuts and omissions during the 2008–09 financial crisis period provides the opportunity to study the predictability of dividend cuts in a controlled environment. Implied dividends and implied volatility, based on put–call parity and computed from put and call option prices, prove to be effective in predicting those cuts, especially compared to only using the equity market and accounting variables conventionally used for this purpose. Options‐derived variables (implied dividends and implied volatility) enhance the ability to identify firms more likely to reduce or omit dividend payments.     

Dividend change announcements,ROE, and the cost of equity capital

We hypothesize and present strong evidence that dividend increases (decreases) result in a general decrease (increase) in the opportunity cost of equity capital (K_e), measured by the discount rate implicit in analysts' forecasts. Estimates of K_e obtained from analyst forecast data likely capture priced information risk that is not reflected in cost of equity capital estimates customarily obtained from empirical excess returns data. In the presence of a full menu of control variables, our measured changes in the cost of equity capital are shown to provide high explanatory power for the market reaction to dividend change announcements. We also hypothesize and demonstrate that the impact of dividend changes on the cost of equity is conditional on how preannouncement K_e relates to preannouncement return on equity (ROE). Specifically, dividend increases result in a reduction in the cost of equity capital only when currently experienced ROE < K_e. This is consistent with shareholders preferring earnings to be reinvested by managers to earn a higher rate than their opportunity rate. When ROE > K_e, on the other hand, the cost of equity capital actually increases. For dividend decreases, the cost of equity capital increases only when ROE > K_e, consistent with firms currently experiencing positive economic income using dividend cuts to signal anticipated permanent earnings declines. Together with extensive robustness tests, our results indicate that dividend changes significantly affect shareholder value, contrary to the longstanding dividend irrelevance argument.     

Does the timing of dividend reductions signal value? Empirical evidence

This paper examines a firm's dividend reduction timing relative to other dividend reductions in the same industry. It tests if the timing of dividend cuts is informative in firm valuation. The findings suggest that during periods of less accessible external financing, such as recessions, firms with greater investment opportunities are among the first firms to make necessary dividend reductions to take advantage of such opportunities. When external financing is more accessible, firms with superior investment opportunities are able to access capital markets in lieu of dividend-reducing internal financing, indicating higher firm values for earlier dividend reductions during periods of costly external financing and significantly lower firm values for early reductions when financing is more easily obtained. A series of empirical tests show that, in periods of less accessible external financing or during a recession, early dividend-reducing firms significantly outperform late reducers in announcement day and contraction cycle cumulative abnormal returns. The results also show that, outside of a recession, early dividend-reducing firms have significantly lower industry contraction cycle returns than late dividend reducers. Additionally, this study compares early dividend reductions that occur during periods of costly external financing (or during a recession) against early reductions that occur when external financing is more available (or outside of a recession) and finds the former to have significantly higher announcement day and contraction cycle cumulative abnormal returns.     

CHANGES IN MARKET PERCEPTION OF RISKINESS: THE CASE OF TOO-BIG-TO-FAIL

In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were “too big to fail,” implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizations, not just those included in the Comptroller's statement. We address this question with two tests. First, through the examination of changes in institutional equity ownership from 1980 through 1988, we find that the announcement is associated with increases in institutional ownership at a time when a comparable set of nonfinancial firms saw reductions in institutional holdings. Second, through the examination of stock returns behavior of bank holding companies around announcements of dividend cuts and omissions from 1974 through 1991, we find that the Comptroller's 1984 announcement altered the market's reaction to dividend cuts and omissions by bank holding companies not specifically included in the Comptroller's statement.     

Optimal dividend control for a generalized risk model with investment incomes and debit interest

This paper investigates dividend optimization of an insurance corporation under a more realistic model, which takes into consideration refinancing or capital injections. The model follows the compound Poisson framework with credit interest for positive reserve and debit interest for negative reserve. Ruin occurs when the reserve drops below the critical value. The company controls the dividend pay-out dynamically with the objective to maximize the expected total discounted dividends until ruin. We show that the optimal strategy, is a band strategy and it is optimal to pay no dividends when the reserve is negative.     

Why firms purchase property insurance

We investigate whether corporate finance incentives affect the extent of corporate hedging with property insurance. Using a database that contains detailed insurance information, we document a positive relation between the expected costs of distress and property insurance coverage. We also show that the dividend payout ratio is negatively associated with property insurance coverage, consistent with the view that firms with high payout ratios insure a smaller fraction of properties due to cash flows in excess of investment needs, easy access to capital markets, or both. Different incentives are important for the insurance deductible and limit of coverage, and the deductible and limit of coverage are substitutes.     

The impact of technical defaults on dividend policy

This paper examines how loan covenant violations impact firm dividend policy. Using contract-level loan data for nonfinancial firms in the US, this study provides evidence that the occurrence of a covenant violation significantly increases the likelihood of a dividend reduction in the subsequent quarter. Moreover, we show that the degree of creditor–shareholder conflict and firm financial constraints are important determinants of dividend cuts upon technical default. Additionally, this paper finds the tendency of dividend cuts upon technical default weakened after the repeal of the Glass–Steagall Act. These findings suggest that loan covenants serve a critical role in mitigating creditor–shareholder conflicts.     

Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion. The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks. Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.     

Tax reforms and the capital structure of banks

This paper studies the link between corporate income tax (CIT) reforms and domestic banks’ financing decisions. We use a dataset of CIT reforms and estimate the effect of tax rate changes on leverage, dividend policies and earnings management of banks. The results suggest that taxation influences all three variables. Leverage increases with the CIT rate in the first three years after the reform. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. The tax effects we find are statistically and economically significant but considerably lower than those found in previous research. Also, dividend pay-outs increase after an increase in CIT rates. This could indicate that banks actively manage their pay-out policies around tax reforms and adjust their capital structure with changes in dividends. Furthermore, banks increase loss loan reserves in anticipation of tax rate cuts since losses become less valuable with lower CIT rates.     

中美资本市场财富效应比较研究

本文从股利支付和资本利得的角度对比分析了中美资本市场财富效应水平,并对其影响因素展开分析。研究发现,我国资本市场财富效应不够显著,A股上市公司虽然具有较高的股利支付倾向,但股利支付率和资本利得属性较弱;股利支付行为迎合监管动机较强,融资分红特征明显,股票股利支付行为具有高送转特征;资本市场估值中枢下移,指数波动性较高,资本利得属性较差。美股上市公司虽然股利支付意愿不及A股,但股利支付率和资本利得属性较强,且上市公司不存在明显的融资分红倾向。基于此,本文从控股股东属性、企业生命周期、管理层侵占行为、宏观经济和资本市场环境四个维度对A股市场财富效应水平展开深入探讨,并从提升公司质量、改善盈利能力、调整投资者结构、加强市场建设、优化股利监管制度五方面提出了改善我国资本市场财富效应的政策建议。     

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.     

Capital gains tax and the capital asset pricing model

This paper develops a version of the Capital Asset Pricing Model that views dividend imputation as affecting company tax and assumes differential taxation of capital gains and ordinary income. These taxation issues aside, the model otherwise rests on the standard assumptions including full segmentation of national capital markets. It also treats dividend policy as exogenously determined. Estimates of the cost of equity based on this model are then compared with estimates based on the version of the CAPM typically applied in Australia, which differs only in assuming equality of the tax rates on capital gains and ordinary income. The differences between the estimates can be material. In particular, with a high dividend yield, allowance for differential taxation can result in an increase of two to three percentage points in the estimated cost of equity. The overall result obtained here carries over to a dividend equilibrium, in which firms choose a dividend policy that is optimal relative to the assumed tax structure.     

Languages and dividends

We study whether languages are related to corporate dividend policies around the world. Users of languages with a weak future time reference (FTR), such as Japanese and Finnish, do not need to grammatically distinguish future and current events, while users of strong-FTR languages such as French and Italian do. Chen (2013) shows that people who use weak-FTR languages may perceive the future to be nearer and have less precise perceptions of the timing of future events than users of strong-FTR languages. We argue that these perceptions may result in a lower discount rate and a higher valuation of future dividends, leading to a weaker preference and demand for a dividend today. Using a large sample of firms from 19 markets, we find supporting evidence that firms in weak-FTR language markets pay lower dividends than firms in strong-FTR language markets. The results remain robust after a battery of robustness tests, including using a single market with multiple languages and using a difference-in-differences approach in a market with a change of official languages. Further evidence shows that weak-FTR languages are related to a lower implied cost of equity capital and stronger market reactions to dividend changes. Our results offer a new explanation for cross-country differences in dividend policies and add to the research on culture and financial markets.     

Dividend Stability, Dividend Yield and Stock Returns: UK Evidence

This paper establishes an empirical role for two measures of dividend stability (as a proxy for dividend policy) in explaining UK stock returns. There is little systematic empirical evidence concerning the relation between dividend stability, dividend yield and stock returns despite the fact that a variety of theoretical models point to dividend policy as an important stock attribute. Here we construct two definitions of dividend stability, one of which involves dividend cuts, and use a sample of all listed UK firms from 1975 to 1997 to explore the relationship between stock returns and a variety of characteristics, including dividend stability. We find an inverse correlation between the stability of past dividend policy and systematic risk. Both stability measures have explanatory power over returns, but this is concentrated in January.     

The Quasi-split Effect, Active Insiders and the Italian Market Reaction to Equity Rights Issues

The positive market reaction at the announcement of most European rights issues can be explained by two major factors which distinguish them from a US public offering: active insiders, and a quasi-split effect which signals a large increase in the dividend yield. An analysis of 428 Italian rights offerings and an event study involving 82 observations in the 1980–94 period show that Italian insiders are completely 'active', and almost 85 % of the equity rights issues result in a dividend yield increase, which corresponds to the quasi-split effect in approximately 40 % of the issues. The dividend yield rises, on average, by a significant +61 % after a combined rights offering and by a significantly lower +20 % following a fully-paid rights issue. The market reaction to the announcement is significantly positive for combined rights offerings (+ 2.77 %) and positive, but not significant, for the whole sample (+ 0.79 %). The dividend increase signalled by the quasi-split effect explains almost 30 % of the abnormal returns' cross-sectional variation and it is the only significant explanatory variable.     

Semiparametric estimation in the optimal dividend barrier for the classical risk model

In the context of an insurance portfolio which provides dividend income for the insurance company’s shareholders, an important problem in risk theory is how the premium income will be paid to the shareholders as dividends according to a barrier strategy until the next claim occurs whenever the surplus attains the level of ‘barrier’. In this paper, we are concerned with the estimation of optimal dividend barrier, defined as the level of the barrier that maximizes the expected discounted dividends until ruin, under the widely used compound Poisson model as the aggregate claims process. We propose a semi-parametric statistical procedure for estimation of the optimal dividend barrier, which is critically needed in applications. We first construct a consistent estimator of the objective function that is complexly related to the expected discounted dividends and then the estimated optimal dividend barrier as the minimizer of the estimated objective function. In theory, we show that the constructed estimator of the optimal dividend barrier is statistically consistent. Numerical experiments by both simulated and real data analyses demonstrate that the proposed estimators work reasonably well with an appropriate size of samples.     

Dividend Stability, Dividend Yield and Stock Returns: UK Evidence

This paper establishes an empirical role for two measures of dividend stability (as a proxy for dividend policy) in explaining UK stock returns. There is little systematic empirical evidence concerning the relation between dividend stability, dividend yield and stock returns despite the fact that a variety of theoretical models point to dividend policy as an important stock attribute. Here we construct two definitions of dividend stability, one of which involves dividend cuts, and use a sample of all listed UK firms from 1975 to 1997 to explore the relationship between stock returns and a variety of characteristics, including dividend stability. We find an inverse correlation between the stability of past dividend policy and systematic risk. Both stability measures have explanatory power over returns, but this is concentrated in January.