John Harris Thornton

Dividend policy and corporate valuation

Purpose The purpose of this paper is to investigate an empirical solution to dividend policy relevance. Design/methodology/approach The paper combines measures of firm maturity in a logit regression to define a comprehensive life-cycle model of the likelihood of dividend payment. The valuation of firms that conform to the model is compared to the valuation of firms that do not fit the model. Valuation is measured by the market to book (M/B) ratio. Findings The analysis indicates that dividend policy is related to firm value. Dividend-paying firms that fit the life-cycle model have a higher median valuation than dividend-paying firms that do not fit the life-cycle model. Similarly, non-paying firms that fit the life-cycle model have a higher median valuation than non-paying firms that do not fit the life-cycle model. The results also provide evidence that the disappearing dividend phenomenon is related to shifts in valuation. Research limitations/implications This paper focuses on the payment of dividends. Stock repurchases are not considered. Practical implications The results indicate that dividend policy is related to firm value. Approximately 15 percent of sample observations have a dividend policy counter to the life-cycle model. Originality/value This paper shows that the relation between a firm’s M/B ratio and dividend policy changes over the firm’s life-cycle. It also shows that the catering motive for dividends is strongest among firms that are outliers in the life-cycle model and firms of intermediate maturity.

Do U.S. Bank Holding Companies Substitute Operational Hedging for Financial Hedging

Risk management in the banking industry occasionally comes into the public spotlight due to events such as the recent financial crisis. Knowledge of bank risk management strategies aids regulators and investors in determining which strategies pose the greatest risk. While derivative use as a bank risk management strategy has been studied, we find only one study examining the linkage between derivative use (financial hedging) and operational hedging. This analysis limits operational hedging to merger and acquisitions activity. Our study uses broader measures of operational hedging. Specifically we examine diversification in the operational areas of non-interest income (NII), loan portfolio composition, and geographic location. We find NII diversification is an operational hedge and is used as a substitute for financial hedging. While loan diversification is not an operational hedge, its relationship to financial hedging depends upon whether the bank holding company (BHC) uses derivatives for trading or for purposes other than trading. Geographic diversification is an operational hedge and its relationship with respect to financial hedging also is contingent upon the type of derivatives (trading or non-trading) used by BHCs.