Nalinaksha Bhattacharyya

Dividend policy: a review

Purpose - This paper aims to briefly review principal theories of dividend policy and to summarize empirical evidences on these theories. Design/methodology/approach - Major theoretical and empirical papers on dividend policy are identified and reviewed. Findings - It is found that the famous dividend puzzle is still unsolved. Empirical evidence is equivocal and the search for new explanation for dividends continues. Also a number of stylized empirical facts about dividends discovered by researchers are noted. Research limitations/implications - As with any review paper, the major limitation is that necessarily some papers will be left out. Also as newer research is published the review paper will become more dated. Originality/value - This paper will give the reader a comprehensive understanding of the dividend puzzle and the major paradigms of dividend policy. The paper will also give the reader the major stylized facts about dividend policy.

Does mutual fund advertising provide necessary investment information

Purpose – Finance theory proposes that consumers require information about the risk‐return trade‐off credibility information to relieve principal‐agent conflict concerns, and transaction cost information – for investment decisions. This paper aims to investigate whether or not such information is present in advertisements for one investment vehicle – mutual funds.Design/methodology/approach – All advertisements in Barrons and Money over two years were content‐analysed to determine the degree to which mutual fund advertising practice adheres to theories regarding information necessary for optimal investment decisions. Use of techniques known to influence advertisement noting (i.e. advertisement size and colour) and copy readership (i.e. visual size, text length, unique selling proposition/brand‐differentiating message, celebrity endorsements, direct or indirect comparisons with competitors, and emotional appeals) was also investigated. Finally, because mutual funds are a financial service, the presence of...

Good Managers Work More and Pay Less Dividends - A Model of Dividend Policy

This model explains dividends as a component of a contract set up by an uninformed principal. I start from a well-documented empirical fact that there is a relation between dividends declared and executive compensation. I find that when hidden information is about the productivity of the agent then dividend – conditional on cash available – bears a negative relationship to managerial type. That is, for a given level of available cash, the lower type manager declares a higher dividend than that declared by a manager with higher productivity. The result is robust under different model extensions. I also discuss empirical implications of the model.

Student Evaluations and Moral Hazard

Most universities solicit feedback from students at the end of a course in order to assess student perceptions of the course. This feedback is used for various objectives, including for evaluating teaching by academic administrators. One would therefore expect faculty to rationally take this into account while formulating their teaching strategy. In certain cases, such strategic considerations can give rise to moral hazard. I have modelled the situation using the well-known Prisoners Dilemma game and found that in equilibrium, the teaching style will be examination-centric, while considerations of societal good would demand that the teaching style be knowledge-centric. I also discuss the policy implications for this finding.

From Mean Variance Space to Mean Skewness Space - Implications for Simultaneous Risk Seeking and Risk Averting Behavior

I propose that the utility function of an economic agent will be concave for wealth below the current wealth and will be convex for wealth above the current wealth. This utility function allows the agent to display simultaneous risk averse and risk seeking behaviour. The cubic utility function and the inverse hyperbolic tangent utility function are examples of such utility functions. For an agent with such an utility function, the expected utility of wealth is independent of the second moment about the current wealth. For such agents, the mean-skewness space is relevant in understanding behaviour. In equilibrium, the efficient frontier in the mean skewness space is either concave and downward sloping or there are at best two portfolios in equilibrium.

Dividends, Executive Compensation, and Agency Costs: Empirical Evidence from Germany

While researchers have found that dividend payout ratios are negatively related to executive compensation in North America, a relevant question remains as to whether such relationships hold in other institutional environments. Evidence from this study suggests that, as in North America, there is a negative relationship between dividend payout ratios and executive compensations in Germany. This study shows, that the role of dividends in resolving agency issues, is relevant not only in market based systems like that in North America but also in bank based systems like Germany. Agency issues also appear to be partially mitigated by the influence of banks. Bank influence is also found to be positively related to dividend payout ratio and thus consistent with the Free Cash Flow Hypothesis of Jensen (1986) and Easterbrook (1984).

Executive compensation and agency costs in a family controlled corporate governance structure: the case of Italy

This paper examines whether dividends are an important mechanism for mitigating agency costs in Italy. Corporate governance in Italy is distinguished by the fact that large numbers of firms are family controlled. Examining a panel of listed Italian firms from 2000-2007, we find that dividends play a significant role in mitigating agency costs, as they do in many countries. Empirical findings further suggest that increases in family control lead to a higher dividend payout; while higher levels of executive compensation leads to a lower dividend payout. Overall, findings suggest that dividends are effective at mitigating agency costs in the environment where family control over corporate governance is prevalent.

Equilibrium Relationship between Expected Return and Skewness

Traditional finance theories assume that investors are risk averse whereas in reality investors exhibit both risk averse and risk seeking behaviors. For example the same individual could be purchasing insurance (risk averse) and lottery ticket (risk seeking) simultaneously. We propose that the utility function of an economic agent is concave (risk averse) for wealth below his/her current wealth and is convex (risk seeking) for wealth above his/her current wealth. This type of utility function allows the agent to display simultaneous risk averse and risk seeking behavior. We show that for an agent with such a utility function, the mean-skewness space is relevant in understanding his/her behavior. More specifically, we prove that in equilibrium, the efficient frontier in the mean-skewness space is concave and downward sloping. We test our equilibrium relationship empirically with stocks listed on the NYSE from 2002 to 2007 and find that our results support our theory.

Agency Issues in a Family - Controlled Corporate Governance Structure - The Case of Italy

This study provides empirical evidence on the relationship between dividend payout ratios, executive compensation and agency costs in Italy. Corporate governance in Italy is distinguished by the fact that a large number of Italian firms are family controlled, which may theoretically reduce asymmetry of information and associated agency costs. Using a panel of listed manufacturing firms we find evidence that family control plays a significant role in resolving agency issues, i.e. that increases in family control of the firm lead to a higher dividend payout. Nevertheless, as we also find that managerial compensations are negatively related to dividend payout ratios, even in this family controlled environment, dividends do play their role in mitigating agency problems.

Rethinking Lintner: An Alternative Dynamic Model of Dividends

Empirical modeling of dividends has been dominated by Lintner (1956). However, Lintners model suffers from the logical paradox that if companies have target payout ratios then in the steady state the companies will have reached those target payout ratios. Moreover as demon-strated by Bond and Mougoue (1991) Lintners model is also poorly specified when earnings are serially correlated. This twin shortfall of Lintners model motivated us to explore the possibility of an alternative dynamic empirical model of dividends. We test our model by cross sectional Tobit regression as well as by time series fitting. We find that the results of the Tobit regression are consistent with the predictions of our model. In time series testing, we find that one of our models fits the empirical reality at least 75% of the time. For firms with longer data series of 35 years or more, our model describes the empirical data succinctly in 96% of the cases.