Bob G. Wood

Dividend policy theories and their empirical tests

Abstract The subject of corporate dividend policy has captivated economists for a long time, resulting in intensive theoretical modeling and empirical examinations. A number of conflicting theoretical models lacking strong empirical support define current attempts to explain the puzzling reality of corporate dividend behavior. The purpose of this paper is to determine if the method of analysis employed, sample period, and/or data frequency are responsible for this inconsistent support. The results presented here are consistent with the contention that no dividend model, either separately or jointly with other models, is supported invariably.

The perception of dividends by professional investors

Purpose – To study the perception of dividends by the professional investor, for whom mutual fund managers are a proxy. The main line of research in dividends is based on using market data that are fit, ex post, to a cherished hypothesis. It is believed, however, that such data cannot measure motivation which is the underlying force behind generating market data. An understanding of motivation will give us more insight into the dividend paradox (why shareholders love dividends) than just the surface reality one can glean from market data. Design/methodology/approach - Using a survey instrument, the method of analysis (not methodology) is factor analysis and hierarchical grouping that uncovers three distinct groups of professional investors re their attitude towards dividend. This categorization clearly shows that the dividends are perceived differently by the groups found here. Thus, research in dividends cannot follow a traditional route in which the phenomenon is treated as universal, or something similar to a natural occurrence. Findings - Three groups from the more traditional: the more growth-oriented, aggressive; and a middle-of-the-road group are posited. Although there are some uniformly accepted tenets across the groups, nevertheless, the more traditional group attributes far more importance to dividends than the growth-oriented group. The latter group perceives dividends as something needed to pacify the shareholder. It is also concluded that none of the academic hypotheses contrived to explain dividend behavior can be supported by empirical evidence. The interesting result is, nevertheless, that the ex post group performance is not significantly different between each possible pairing of the three groups. Research limitations/implications - As all empirical research goes, results cannot be all-conclusive, because of time and participation in the sample. This fact alone should not grind to a halt all empirical work. This work is part of a segment of three different studies examining the perception of dividends by corporate managers, and across countries. The next logical step is obviously studying the perception of dividends by the non-professional investor. Originality/value - This kind of work was almost never done. This is a first, because unfortunately traditional research that dominates most finance journals does not believe that motivation counts. First, because it satisfies ones desire to better understand the dividend puzzle. But it should be of interest to all who want to study the dividend decision in the firm, and why shareholders love dividends, something entirely not rational as far as economic rationality goes.

Dividend Policy of Regulated Industries

This chapter focuses on dividend policy of regulated industries, measuring dividend policy based on dividend payout ratio and yield. Regardless of the rationale for dividend payment, it is generally recognized that fundamental differences exist in the dividend policies of unregulated and regulated firms. A reason for this difference in dividend policy is that historically the investment opportunity set available to regulated firms has been restricted, and these restrictions have limited the capital gains potential from equity investments in regulated firms. Unregulated firms pay out a substantially smaller portion of their earnings than do most regulated industries, especially utilities and Real Estate Investment Trusts (REITs), and the dividend yield of unregulated firms is significantly smaller than the corresponding yield of most regulated firms, with insurance companies being an exception. The tax liability associated with the receipt of dividends as ordinary income, plus the flotation costs associated with new issues, would have to be less than the net transactions cost of receiving the income as capital gains.

Gold or Pyrite: The Importance of Information to the Professional Investor

The individual investor is faced with an ever-increasingstream of traditional and electronic sources of often contra-dictory financial information. This survey examines the rel-ative importance of government economic indicators, printmedia sources, and broadcast media programs to equitymutual fund managers. We find that these professionals ratethe Philadelphia Fed Index—a regional summary manufac-turing measure—as significantly more important to theirinvestment decision-making process than other better knownmeasures. At the same time, The Wall Street Journaldominatesprint media sources while CNBCs Squawk Box signifi-cantly dominates other broadcast media programs. The find-ings of this survey suggest that individual investors cansignificantly reduce the volume of investment informationsources in their investment decision-making process.

Preferred Stock and Dividends

This chapter presents various features of preferred stocks, how they originated, and how their stockholders are treated. The adjective “preferred” in preferred stock implies that the holders of such shares are preferred when it comes to the distribution of income. This would mean that before common stock can receive any cash dividend distribution, the preferred stockholder has to be paid. Most preferred stocks are cumulative—that is dividends were not paid in a quarter, it accumulates for the next quarter, and the quarter after, until all accrued dividends are paid. The official Financial Accounting Standards Board (FASB) treats them as a kind of equity that is preferred over other types of equity, as far as distribution of income is concerned. This perception is rooted in the historical origins of the preferred stock. The idea for preferred stocks can be traced to Europe where shares with dividend priority or preference already existed. The second stage in the development of preferred stock began in the next decade with the sale of shares to private investors. The promise of regular dividends was exchanged for new funds.

Preferred Stock and Dividends: A Revealing Divergence

This chapter presents various features of preferred stocks, how they originated, and how their stockholders are treated. The adjective “preferred” in preferred stock implies that the holders of such shares are preferred when it comes to the distribution of income. This would mean that before common stock can receive any cash dividend distribution, the preferred stockholder has to be paid. Most preferred stocks are cumulative—that is dividends were not paid in a quarter, it accumulates for the next quarter, and the quarter after, until all accrued dividends are paid. The official Financial Accounting Standards Board (FASB) treats them as a kind of equity that is preferred over other types of equity, as far as distribution of income is concerned. This perception is rooted in the historical origins of the preferred stock. The idea for preferred stocks can be traced to Europe where shares with dividend priority or preference already existed. The second stage in the development of preferred stock began in the next decade with the sale of shares to private investors. The promise of regular dividends was exchanged for new funds.

Dividend Reinvestment Plans

This chapter focuses on the features of dividend reinvestment plans (DRIPs), which have their roots in the late 1920s. About more than 1500 firms with DRIPs, representing all walks of life in corporate America, are listed on the internet. In practicality, the DRIP allows small investors to use dollar averaging, bypassing the broker and saving on possibly high brokerage fees. DRIP allows bondholders and preferred stockholders to reinvest coupon payments and preferred dividends in the firms stock and permit customers of the business to contribute through billing systems and savings accounts. DRIP provides safekeeping facilities for stockholders who want to leave their shares with the plan administrator. The most obvious disadvantage of the DRIP from the shareholders point of view is the tax aspect. Taxes must be paid, out of pocket, for the reinvested dividends, and records must be kept concerning the timing and purchase price of the shares.

Dividend Reinvestment Plans: A Puzzle within the Puzzle

This chapter focuses on the features of dividend reinvestment plans (DRIPs), which have their roots in the late 1920s. About more than 1500 firms with DRIPs, representing all walks of life in corporate America, are listed on the internet. In practicality, the DRIP allows small investors to use dollar averaging, bypassing the broker and saving on possibly high brokerage fees. DRIP allows bondholders and preferred stockholders to reinvest coupon payments and preferred dividends in the firms stock and permit customers of the business to contribute through billing systems and savings accounts. DRIP provides safekeeping facilities for stockholders who want to leave their shares with the plan administrator. The most obvious disadvantage of the DRIP from the shareholders point of view is the tax aspect. Taxes must be paid, out of pocket, for the reinvested dividends, and records must be kept concerning the timing and purchase price of the shares.

The “Balance Sheet” of Academic Research: What It Does/Does Not Prove

This chapter empirically tests in a rigorous statistical framework what the preponderance of models that attempt to explain empirically the dividend puzzle show or do not show. The categorical data analysis method (CDAM) determines whether the method of analysis, observation frequency, and sample period can be used to predict and explain the results of a research. CDAM is a specialized, multivariate analysis technique for the evaluation of response and explanatory variables using weighted least-squares (WLS) procedures. Iterative WLS improves WLS estimates by first estimating the weights, fitting the regression function, and calculating the residuals. Next, the residuals from the first estimation are used to re-estimate the weights and to refit the regression. CDAM and analysis of variance (ANOVA) are similar methods of analysis in one respect—both estimate the interaction between variables. No single economic rationale can explain the dividend phenomenon. The corporate tradition of paying dividends is the sum total of more than 300 years of evolution of the practice of dividend payments. Despite individual differences in policy, consistent identifiable patterns of dividend payment recur through corporations. The chapter concludes that tests of dividend policy theories will remain both inconclusive and inconsistent.

The “Balance Sheet” of Academic Research

This chapter empirically tests in a rigorous statistical framework what the preponderance of models that attempt to explain empirically the dividend puzzle show or do not show. The categorical data analysis method (CDAM) determines whether the method of analysis, observation frequency, and sample period can be used to predict and explain the results of a research. CDAM is a specialized, multivariate analysis technique for the evaluation of response and explanatory variables using weighted least-squares (WLS) procedures. Iterative WLS improves WLS estimates by first estimating the weights, fitting the regression function, and calculating the residuals. Next, the residuals from the first estimation are used to re-estimate the weights and to refit the regression. CDAM and analysis of variance (ANOVA) are similar methods of analysis in one respect—both estimate the interaction between variables. No single economic rationale can explain the dividend phenomenon. The corporate tradition of paying dividends is the sum total of more than 300 years of evolution of the practice of dividend payments. Despite individual differences in policy, consistent identifiable patterns of dividend payment recur through corporations. The chapter concludes that tests of dividend policy theories will remain both inconclusive and inconsistent.