Dividends and Dividend Policy PDF
Preview Dividends and Dividend Policy
DIVIDENDS AND DIVIDEND POLICY The Robert W. Kolb Series in Finance provides a comprehensive view of the field of finance in all of its variety and complexity. The series is projected to include approximately65volumescoveringallmajortopicsandspecializationsinfinance, ranging from investments, to corporate finance, to financial institutions. Each volume in the Kolb Series in Finance consists of new articles especially written forthevolume. EachKolbSeriesvolumeiseditedbyaspecialistinaparticularareaoffinance,who develops the volume outline and commissions articles by the world’s experts in thatparticularfieldoffinance.Eachvolumeincludesaneditor’sintroductionand approximatelythirtyarticlestofullydescribethecurrentstateoffinancialresearch andpracticeinaparticularareaoffinance. The essays in each volume are intended for practicing finance professionals, graduate students, and advanced undergraduate students. The goal of each vol- umeistoencapsulatethecurrentstateofknowledgeinaparticularareaoffinance sothatthereadercanquicklyachieveamasteryofthatspecialareaoffinance. DIVIDENDS AND DIVIDEND POLICY H. Kent Baker TheRobertW.KolbSeriesinFinance JohnWiley&Sons,Inc. Copyright(cid:2)c 2009byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,or transmittedinanyformorbyanymeans,electronic,mechanical,photocopying, recording,scanning,orotherwise,exceptaspermittedunderSection107or108ofthe 1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthe Publisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetothe CopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978) 750-8400,fax(978)750-4470,oronthewebatwww.copyright.com.Requeststothe PublisherforpermissionshouldbeaddressedtothePermissionsDepartment,John Wiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201) 748-6008,oronlineathttp://www.wiley.com/go/permissions. 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Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthat appearsinprintmaynotbeavailableinelectronicbooks.Formoreinformationabout Wileyproducts,visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Baker,H.Kent(HaroldKent),1944– Dividendsanddividendpolicy/H.KentBaker,RobertW.Kolb. p.cm. Includesindex. ISBN978-0-470-45580-7(cloth) 1.Dividends. I.Kolb,RobertW.,1949– II.Title. HG4028.D5.B252009 332.63(cid:3)221–dc22 2008054318 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 Contents Acknowledgments xvi PART I Dividends and Dividend Policy: History, Trends, and Determinants 1 1. DividendsandDividendPolicy:An Overview 3 Introduction 3 DividendsandDividendPolicy:History,Trends, andDeterminants 6 CashDividends:TheoreticalandEmpiricalEvidence 7 ShareRepurchases 10 OtherDistributionMethods 12 SurveyEvidenceonDividendsandDividendPolicy 13 OtherDividendIssues 15 Conclusions 16 References 18 AbouttheAuthor 19 2. TheHistoricalEvolutionofDividends 21 Introduction 21 AHistoricalOverview 21 Corporations,Returns,andDividendsbefore1800 22 TheRiseoftheCorporationinEnglandandHollandto1720 22 CorporationsandDividendsinAmericato1800 24 DividendsintheNineteenthCentury 25 LegislationintheEarlyNineteenthCentury 26 NewIndustriesandDividends 27 DividendsintheTwentiethandTwenty-FirstCenturies 28 DividendTrends:1900–1962 29 TheDevelopingResearchonDividends 30 Conclusions 32 References 32 AbouttheAuthor 34 3. TrendsinDividends:PayersandPayouts 35 Introduction 35 v vi Contents DisappearingDividends 35 Background 35 TheEvidence 36 PossibleReasonsfortheDisappearanceofDividends 39 ReappearingDividends 44 Background 44 DidDividendsEverDisappearintheRestoftheWorld? 47 Conclusions 51 References 51 AbouttheAuthors 53 4. FactorsInfluencingDividends 55 Introduction 55 FirmCharacteristics 57 FirmFundamentals 58 OtherNonfundamentalFirmCharacteristics 58 MarketCharacteristics 59 Taxes 59 InvestorProtectionLaws 60 InvestorSentiment 61 PublicversusPrivateStatus 62 CharacteristicsofNewlyListedPublicCompanies 62 ProductMarketCompetition 63 SubstituteFormsofPayout 64 Conclusions 65 References 66 AbouttheAuthors 68 5. Cross-CountryDeterminantsofPayoutPolicy: EuropeanFirms 71 Introduction 71 DividendPoliciesofEuropeanFirms 72 DistinctiveFeaturesofEuropeanCorporateGovernance 72 TrendsinEuropeanDividendPolicy 73 FractionofDividend-PayingFirms 73 PayoutRatiosbyCountry 75 PayoutRatiosbyIndustry 78 PayoutRatiosbyFirmSize 78 DividendTrends:ComparisonofEuropeandthe UnitedStates 81 EuropeanDividendPolicy:SurveyofManagers 81 DividendPolicy 82 ShareRepurchasePolicy 87 ComparisonofEuropeanandU.S.Managers’Views 87 Conclusions 90 References 91 AbouttheAuthors 93 CONTENTS vii PART II Cash Dividends: Theoretical and Empirical Evidence 95 6. DividendIrrelevanceTheory 97 Introduction 97 TheoriesbeforeIrrelevance 97 MM’sDividendIrrelevance 99 TheImpactofMarketImperfections 104 Taxes 104 InformationAsymmetry 105 AgencyCosts 107 ClienteleEffects 108 RecentChallengestoIrrelevance 109 Conclusions 110 References 111 AbouttheAuthors 113 7. ResidualDividendPolicy 115 Introduction 115 ConceptualBasis 116 MacroAnalysisofDividendBehavior 119 InferencesfromAccountingDataandMarketReactions 120 SurveyEvidence 122 Conclusions 124 References 124 AbouttheAuthor 126 8. TaxesandClientele Effects 127 Introduction 127 DividendPolicyinaWorldwithoutTaxes 128 DividendPolicyinaWorldwithTaxes 130 DividendClienteles 131 Ex-DividendDayStudies 132 TaxRateChangesandDividendPolicy 134 TheTaxReformActof1986 135 TheJobsandGrowthTaxReliefReconciliation Actof2003 136 CanadianTaxReform 137 DividendTaxationandCorporateGovernance 137 TheRoleofDominantShareholders 138 Conclusions 139 References 140 AbouttheAuthors 143 9. AgencyCostsandtheFreeCashFlowHypothesis 145 Introduction 145 viii Contents FreeCashFlowTheory 146 EmpiricalTestsofFreeCashFlowHypotheses 147 PriceReactiontoOverinvestmentPotential 147 DividendChanges:LeadingorLaggingIndicator ofProfitability? 152 DividendsandSeverityofAgencyProblems 154 VaryingRoleofDividendsacrosstheWorld 155 Conclusions 157 References 158 AbouttheAuthor 161 10. AsymmetricInformationandSignalingTheory 163 Introduction 163 SignalingModels 164 EmpiricalEvidence 166 EarlyWorks 167 DividendReductions 168 ExpropriationEffects 168 OverinvestmentHypothesis 169 DividendsversusEarnings 169 ProxiesforInformationAsymmetry 171 DividendsSignalingFutureEarnings 171 SpecialDividends 172 DividendsversusStockRepurchase 172 InitiationsandOmissionsofDividends 172 SignalingversustheClienteleEffect 173 SignificanceoftheMagnitudeofDividendChanges 173 FutureDirectionsofResearch 174 Conclusions 174 References 175 AbouttheAuthor 177 11. BehavioralExplanationsofDividends 179 Introduction 179 TheoreticalFramework 181 NeoclassicalStructure 181 NeoclassicalDividendIrrelevance 182 EmpiricalEvidence 191 DividendsandConsumption 192 DividendsandWithdrawals 192 ClienteleEffectsInvolvingAge,RetirementStatus, andIncome 194 TaxesandTransactionCosts 196 Catering,PerceptionsaboutRiskandReturn,andTolerance forRisk 197 Conclusions 197 References 198 AbouttheAuthor 199 CONTENTS ix 12. TheFirmLifeCycleTheoryofDividends 201 Introduction 201 TheLifeCycleTheoryoftheFirm 202 DividendsintheFirm’sLifeCycle 203 ASimpleStaticModelofOptimalDividendPolicy 203 CostofCapitalovertheFirm’sLifeCycle 205 EmpiricalEvidence 206 LifeCycleFactorsandthePropensitytoPayDividends 207 LifeCycleFactorsandDividendChanges 208 LifeCycleFactorsandDividendInitiations 209 DividendInitiationintheLifeCycleofaFirm:TheCase ofMicrosoft 209 Conclusions 211 References 212 AbouttheAuthors 213 13. TheCateringTheoryofDividends 215 Introduction 215 BakerandWurgler’sCateringTheoryofDividends 216 TheModel 217 ProxiesCapturingtheDividendPremium 219 DividendPaymentVariables 220 BakerandWurgler’sEmpiricalEvidence 220 ExtensionstotheCateringTheoryofDividends 222 DividendLevels 222 TheFrequencyofDividendPayments 223 TheRoleofCateringinExplainingOtherDividendTheories 223 AsymmetricInformationandSignaling 223 AgencyModels 224 EvidencefromEmpiricalStudies 225 U.S.Evidence 225 U.K.Evidence 230 EuropeanEvidence 231 Cross-CountryEvidence 232 BeyondCateringforInvestors’Sentiments 232 Split-CapitalClosed-EndFunds 232 ShareRepurchases 233 CateringTheoryofEarningsManagement 233 WhyDoInvestors’PreferencesforDividendsChange overTime? 233 Conclusions 234 References 235 AbouttheAuthors 238 PART III Share Repurchases 239 14. StockRepurchases:TheoryandEvidence,Part1 241 Introduction 241 x Contents ShareRepurchaseMethods 242 PotentialMotivesforShareRepurchases 245 RegulationandTaxes 245 AgencyCostsofFreeCashFlows 247 SignalingandUndervaluation 250 Conclusions 256 References 257 AbouttheAuthors 259 15. StockRepurchases:TheoryandEvidence,Part2 261 Introduction 261 MotivesforShareRepurchase 261 CapitalStructure 261 TakeoverDeterrence 262 EmpiricalResults 264 Stock-OptionGrantsandEarningsManagement 266 CashDividendsversusStockRepurchases 268 Conclusions 270 References 271 AbouttheAuthors 273 16. StockRepurchasesandDividends:Trade-Offs andTrends 275 Introduction 275 RepurchasesandDividends:TheHistoricalRecord 276 MeasuringRepurchases 277 MethodsforRepurchasingShares 278 Open-MarketRepurchases 278 Fixed-PriceTenderOffers 279 DutchAuctions 279 RepurchasesversusDividends:Trade-OffsandTrends 279 Taxes 280 ManagerialFlexibility 281 ManagementofEarningsperShare 281 ManagementofEmployeeStockOptions 282 DefenseagainstHostileTakeovers 282 TheoreticalModelsoftheRepurchaseDecision 283 RepurchasesandValuation 285 Conclusions 288 References 289 AbouttheAuthor 290 17. Beating theMarketwithShareBuybacks 291 Introduction 291 AnomalousPriceBehavioraroundRepurchaseTenderOffers 293 MarketUnderreactionafterOpen-MarketBuyback Announcements 295 PrivateRepurchasesandLong-TermReturns 301
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