Bin Chang

Why Firms Do Not Pay Dividends: The Canadian Experience

We use a survey approach to investigate the factors leading to the decision not to pay cash dividends in Canada. Our results show that Canadian managers perceive growth opportunities, low profitability, and cash constraints as the major underlying reasons for a firm’s decision not to pay dividends. Questionnaire results also show that, for non-dividend-paying firms, taxation is at best a second-order determinant of dividend policy and that stock repurchases are not substitutes for dividends. Finally, our findings are inconclusive regarding managers’ views on the relationship between dividend policy and stock prices and the signaling role of dividend policy.

Canadian corporate payout policy

Purpose - The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings. Design/methodology/approach - The study uses logistic regressions to examine the likelihood of paying dividends and the timing of repurchases and OLS regressions to examine the level of payout. Findings - The fraction of dividend-paying firms declines from 1988 to 2001 and then slightly rebounds until the end of the sample period in 2006. Firm size, profitability, investment opportunities, and catering incentives explain the likelihood of paying dividends. Unlike US firms, Canadian repurchase-only firms do not become important payers in terms of either the percentage of firms or the level of payout. Dividend-only firms pay out significant amounts of cash. Firms with both regular dividends and regular repurchases pay out the largest amount. The payout of different groups of payers is determined by their earnings. Testing firms with both regular dividends and regular repurchases reveals that earnings, undervaluation, and availability of cash explains the timing of repurchases but earnings mainly explains the level of repurchases. Research limitations/implications - Canadian data are unavailable after 2006, which precludes investigating the potential implications of the financial crisis beginning in 2007. Originality/value - This is the first paper to analyze the evolution of the relationship between payout and earnings in Canada.

Which Analysts Lead the Herd in Stock Recommendations

This article identifies a leader–follower relationship in stock recommendations and documents the characteristics of lead analysts. We develop a metric for identifying lead analysts based on the observation that lead analysts have directed a “path” for the consensus in the past year. We find that recommendations are more likely to direct a path for the consensus when they are issued by lead analysts, accompanied by concurrent earnings forecast in the same direction from the same analysts, away from the consensus, followed by price momentum, issued on large and high growth firms, and issued by analysts from large brokers with less frequent recommendations. This result still holds even after controlling for public information, excluding news announcement dates, Regulation Fair Disclosure legislation, and other robustness checks. Empirical analysis shows that there is a greater market reaction to the recommendations of lead analysts than others.

Corporate Governance and Dividend Payout Policy: Beyond Country-Level Governance

We address the mixed empirical findings on how corporate governance affects dividend payout policy by analyzing a large sample of firms from 30 countries. Our results indicate that firms with better firm-level governance pay more dividends, even when we control for country-level governance. However, this relation is only pronounced in countries with low shareholder rights. In addition, we find that when shareholder rights index is high, firm-level governance is unrelated to dividend payout. Our results are robust to the choice of firm-level governance index, the inclusion of the originality of law, culture, creditors’ rights, alternative measures of dividend payout, the hierarchical modeling technology, and approaches to address endogeneity concerns. We also find that dividend payments are associated with higher firm value, and investors positively value the dividend payments of poorly governed firms.

The Influence of Productivity Growth on EquityMarket Performance

Ultimately, stock market performance has to be driven by the real side of the economy, and more specifically, economic growth. However, it is well known that there is a difference between growth resulting from improvements in productivity and growth resulting from an increase in inputs, with the former translating into higher living standards. The authors utilize productivity growth data from the NBER-CES and BLS research programs and link productivity growth with stock market performance. They assess whether productivity gains are passed through to shareholders or are bid away through competition, and therefore, whether there is an investment strategy that can be built using these productivity data. Their results show that investing in high productivity growth industries over the long term generates returns in excess of the market, even after adjusting for risk. As such, they show that productivity growth is an important dimension of investment returns and should influence investment strategies. However, if productivity growth is to be used to create profitable investment opportunities, the challenge is to accurately forecast productivity growth on a timely basis.