Dividends and Dividend Policy

529 Pages·2009·4.71 MB·English

by  H. Kent Baker(auth.)

DIVIDENDS
AND
DIVIDEND
POLICY
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DIVIDENDS
AND
DIVIDEND
POLICY
H. Kent Baker
TheRobertW.KolbSeriesinFinance
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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