revisiting managerial perspectives

FINANCIAL MANAGEMENT, 12 December 2005

Presented by Mr. Batu&

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Financial Management

IntroductionPrevious ResearchResearch Question

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Survey Result Conclusion

Revisiting Managerial Perspectiveson Dividend Policy

Last Updated: April 28, 2023

H. Kent Baker, Gary E. Powell, and E. Theodore Veit



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ABSTRACKWe survey managers of Nasdaq firms that consistently

pay cash dividends to determine their views about dividendpolicy, the relationship between dividend policy and value,and four common explanations for paying dividends. The

evidence shows that managers stress the importance ofmaintaining dividend continuity and widely agree that

changes in dividends affect firm value. Managers give the strongest support to a signaling explanation for paying

dividends, weak to little support for the tax-preference and agency cost explanations, and no support to the bird-in-the-hand explanation. The study provides new evidence about

how managers view dividend life cycles and residual dividend policy.



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INTRODUCTION

One of the more puzzling issues in corporate finance involves dividends. To help explain this puzzle, financial economists developed various theories—signaling, tax-preference, agency costs, and bird-in-the-hand explanations.



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PREVIOUS RESEARCH

1. Determining a Firm’s Dividend Policy2. Dividend Policy and Value3. Explanations for Paying Dividends



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Determining a Firm’s Dividend Policy

• Lintner (1956) reports that firms have long-run target dividend payout ratios and place their attention more on dividend changes than on absolute dividend levels

• Several studies including Fama and Babiak (1968), Baker, Farrelly, and Edelman (1985), and Baker and Powell (1999) support Lintner’s behavioral model

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Dividend Policy and Value

• Much empirical research exists investigating whether dividend policy affects firm value

• Graham and Dodd (1951) and Gordon (1959) argue that an increase in the dividend payout increases stock price (value) and lowers the cost of equity, but empirical support for this position is weak

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Explanations for Paying Dividends• Miller and Rock (1985), suggest that managers as

insiders choose dividend payment levels and dividend increases to signal private information to investors.

• Brennan’s (1970), dividend-paying stocks must offer higher pre-tax returns than non-dividend-paying stocks.

• Easterbrook (1984) argues that firms pay dividends to help reduce the agency costs associated with the separation of ownership and control.

• bird-in-the-hand explanation asserts that paying higher dividends increases firm value because dividends represent a “sure thing” while future share price appreciation is uncertain.

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RESEARCH QUESTIONS

• what views do Nasdaq managers from dividend-paying firms have on the dividend-setting process?

• do corporate managers of dividend-paying Nasdaq firms believe a firm’s dividend payout can affect firm value?

• what explanations for paying dividends do Nasdaq managers tend to favor?



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METHODOLOGY

• Population Studied• Survey Design• Limitations



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Population Studied

• initial group of firms consists of all 651 firms whose stocks are traded on Nasdaq that paid eight consecutive quarterly cash dividends during 1996 and 1997.

• After searching the 1999 Edition of Standard & Poor’s Register of Corporations and Hoover’s Online for the names and addresses of a top financial officer of each firm, we obtain a final group of 630 firms.

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Survey Design

• pre-tested preliminary versions of the survey instrument

• sent a mailing to 630 financial managers of Nasdaq firms

• asked respondents to indicate their general opinion about each of 27 closed-end statements

• getting a 29.8 percent response rate

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Limitations

• the possibility of non-response bias exists• the probability of getting responses to

each question might depend on the question’s location in the survey

• respondents may not properly understand the questions or the questions might not elicit the appropriate information

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SURVEY RESULT

• Corporate Dividend Policy• Dividend Policy and Firm Value• Explanations for Paying Dividends



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Corporate Dividend Policy

• From Table I, Nasdaq managers show the highest level of agreement with S4, S5, S6, S7, S8

• the respondents generally agree with two statements about well-documented historical patterns on dividends (S1 and S2)

• the pattern of cash dividends generally changes over a firm’s life cycle (S3)



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Dividend Policy and Firm Value

Table 2 report:• More than 90 percent agree with (S11)• More than 80 percent of the respondents agree

with (S10) and (S13)• About 65 percent the respondents agree with

(S9)• Only about half agree with (S15) • The respondents express slight agreement (mean

= 0.21) with S12 but slight disagreement (mean = -0.28) with S14



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Explanations for Paying Dividends

Panel A and B Table 3 report:• Managers agree most strongly with (S18),

(S20) and (S22)• While still supportive, managers are less

enthusiastic about the statements (S17), (S19) and (S21)

• The majority of respondents (54.9 %) disagree with (S16) and 28.0 percent express no opinion

Continued…



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Explanations for Paying Dividends (continued)

Panel C and D Table 3 report:• The majority of respondents agree with

(S23)• The most common response for S24 and

S25 is “no opinion.” • Managers express only slight agreement

(mean = 0.14) with (S27)• Respondents disagree strongly with (S26)



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CONCLUSION• Results show that respondents from dividend-

paying Nasdaq firms strongly agree with statements supporting Lintner’s (1956) findings.

• Nasdaq managers widely support statements consistent with the concept that a firm’s dividend policy matters. They agree that an optimal dividend policy strikes a balance between current dividends and future growth that maximizes stock price, and that a firm should formulate its dividend policy to produce maximum value for shareholders.

Continued…



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CONCLUSION (continued)

• Managers give the strongest support to a signaling explanation for paying dividends

• This study also provides some additional insights about several dividend policy issues. For example, most responding managers are aware of historical patterns relating to dividends and earnings.

• Our study also provides some support for the concept of a dividend life cycle set forth by Damodaran (1999)



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DISCUSSION..…



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Wassalaamu’alaikum………

STARRING:Cardison Lumban Batu

Dian Purnomo Jati

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