Essays On Corporate Dividend Policy

This dissertation consists of two essays on corporate policy. The first chapter analyzes whether being labeled a "growth" firm or a "value" firm affects the firms dividend policy. I focus on the dividend policy because of its discretionary nature and the link to investor demand. To address endogeneity concerns, I use regression discontinuity design around the threshold to assign firms to each category. The results show that "value" firms have a significantly higher dividend payout - about four percentage points - than growth firms. This approach establishes a causal link between firm "growth/value" labels and dividend policy. The second chapter develops investment policy model which associated with duration of cash flow. Firms are doing their business by operating a portfolio of projects that have various duration, and the duration of the project portfolio generates different duration of cash flow stream. By assuming the duration of cash flow as a firm specific characteristic, this paper analyzes how the duration of cash flow affects firms investment decision. I develop a model of investment, external finance, and savings to characterize how firms decision is affected by the duration of cash flow. Firms maximize total value of cash flow, while they have to maintain their solvency by paying a fixed cost for the operation. I empirically confirm the positive correlation between duration of cash flow and investment with theoretical support. Financial constraint suffocates the firm when they face solvency issue, so that model with financial constraint shows that the correlation between duration of cash flow and investment is stronger than low financial constraint case.

This dissertation is comprised of two essays on dividend policy. In the first part of the first essay, I ascertain whether the outcome, the substitution, or the predation model explains the relationship between dividend payouts and product market competition in each of the Group of Seven (G7) countries for the period from 1995 through 2010. I find that the substitution model explains dividend policy in Canada, France, Germany, the United Kingdom, and the United States, and the outcome model describes it in Japan, while in Italy, the results are inconclusive. In the second part of the same essay, I pool the sample across the G7 countries and examine whether the outcome or the substitution model explains the relationship between payouts and product market competition. Additionally, I study the impact of various country characteristics - legal origin, religion, presence of corruption, and gross national income -on the relationship between payouts and industry competition. The results show that the substitution model explains dividend policy across the G7 nations. In addition, in countries with better investor rights dividend policy is explained by the substitution model, while in countries with poor investor protections the outcome agency model explains dividend policy. Thus, this essay first tests the three theories on dividend policy, and then it addresses how dividend policy responds to changes in external environments - country characteristics - in the presence of changing levels of competition. In the second essay, I explore whether managers utilize behavioral finance such as the convenience hypothesis, the attraction hypothesis, and the left digit effect in establishing dividend policy. Specifically, I examine whether clustering and rigidity exist in dividends per share (DPS) ending in zero and five. The study is conducted using Compustat dividend-per-share data for Canada and the United States for the period from 1995 through 2010, and for France, Germany, and Italy for the period from 1999 through 2010. I find that clustering (frequency) and rigidity (duration of DPS and number of DPS changes) are prevalent in DPS ending in zero and five, as hypothesized. Moreover, clustering and rigidity in zero-ending DPS are more prevalent than in those ending in five, as predicted. Finally, clustering and rigidity are nonexistent in DPS ending in nine in all countries tested. These findings would suggest that managers are utilizing behavioral finance in establishing dividend policy.

Dividend Policy provides a comprehensive study of dividend policy. It explores the puzzle presented by dividends: irrational and subject to fashion, yet popular and desirable, they remain a priority among managers, even while perceived as largely symbolic. After exploring the history of dividend payments, from the emergence of the modern corporation to current perspectives, it traces the evolution of academic models on dividend policy. Here the authors review models of symmetric and asymmetric information before analyzing academia's accomplishments in solving the dividend puzzle. Related subjects, such as valuation and wealth distribution, round out the authors' presentation about new ways to think about one of the most intriguing subjects in financial economics. The book is recommended for professors and students in departments of finance and business, corporate finance staff, and financial regulators. The only comprehensive study of dividend policy Covers the historical evolution of dividends and academic research on dividend policy Presents new ways of thinking about dividends and dividend policy