Dividend Policy
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The life cycle theory of the firm posits that a company's dividend policy changes over different phases of its life cycle. Specifically: 1) Young firms tend not to pay dividends as they are in growth phases, while mature firms tend to pay dividends regularly. 2) Initiating dividend payments can signal a firm is entering a mature phase with lower growth. However, the type of change depends on whether a firm has fully matured or is beginning to slow down. 3) While all firms paying dividends see agency costs reductions, high-growth mature firms see the largest cash reductions, which does not affect their capital expenditures.
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International Journal of Business and Finance Research Vol. .docx
International Journal of Business and Finance Research
Vol. 9, No. 2, 2015, pp. 1-20
ISSN: 1931-0269 (print)
ISSN: 2157-0698 (online)
www.theIBFR.org
RETURNS FOR DIVIDEND-PAYING AND NON
DIVIDEND PAYING FIRMS
Yufen Fu, Tunghai University
George W. Blazenko, Simon Fraser University
ABSTRACT
In this paper, we compare the equity returns of dividend-paying and non-dividend paying firms. We find no
unconditional return difference even though non-dividend paying firms have many characteristics that
suggest high risk. Equivalently, because non-dividend paying firms have high risk-metrics, their returns
are abnormally low compared with dividend-paying firms. The reason for these anomalies is that a larger
fraction of non-dividend paying firms are in financial distress and, despite high distress-risk and high
growth-leverage, firms in financial distress have low returns from high volatility that decreases the options-
leverage of equity. Removing firms in financial distress, returns for non-dividend paying firms increase
relative to dividend-paying firms and abnormal returns disappear. We argue that part of the reason that
firms in financial-distress have high volatility that leads to low returns is managerial risk-shifting that takes
form as unexpectedly high capital expenditure rates.
JEL: G12, G32, G33, G35
KEYWORDS: Equity Returns, Dividends, Financial Distress, Volatility, Growth
INTRODUCTION
n perfect capital markets, Miller and Modigliani (1961) show the wealth of a firm’s shareholders is
invariant to corporate dividend policy. Across firms, returns for dividend-paying and non-dividend
paying firms can differ if their corporate financial characteristics differ. The financial literature
identifies several differences between dividend-paying and non-dividend paying firms. Pastor and Veronesi
(2003) report that non-dividend paying firms have high profit volatility, high return volatility, and high
market/book ratios. Fama and French (2001) find that non-dividend paying firms are smaller and less
profitable but have better growth opportunities. Rubin and Smith (2009) characterize non-dividend paying
firms as younger, smaller, and more levered. DeAngelo, DeAngelo and Stulz (2006) find that firms pay
dividends when retained earnings are a large fraction of book-equity, which means that dividend-paying
firms are more profitable. Fuller and Goldstein (2011) report that non-dividend paying firms have higher
returns in advancing markets (and conversely), which means higher leverage. Blazenko and Fu (2010, 2013)
find a positive value-premium for dividend-paying firms but a negative value-premium for non-dividend
paying firms. Investors might reasonably conclude from these differences that non-dividend paying firms
are riskier than dividend-paying firms.
However, Fuller and Goldstein (2011) report that dividend-paying firms have returns that exceed non-
dividend paying firms. We find no statisti.
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Vol. 9, No. 2, 2015, pp. 1-20
ISSN: 1931-0269 (print)
ISSN: 2157-0698 (online)
www.theIBFR.org
RETURNS FOR DIVIDEND-PAYING AND NON
DIVIDEND PAYING FIRMS
Yufen Fu, Tunghai University
George W. Blazenko, Simon Fraser University
ABSTRACT
In this paper, we compare the equity returns of dividend-paying and non-dividend paying firms. We find no
unconditional return difference even though non-dividend paying firms have many characteristics that
suggest high risk. Equivalently, because non-dividend paying firms have high risk-metrics, their returns
are abnormally low compared with dividend-paying firms. The reason for these anomalies is that a larger
fraction of non-dividend paying firms are in financial distress and, despite high distress-risk and high
growth-leverage, firms in financial distress have low returns from high volatility that decreases the options-
leverage of equity. Removing firms in financial distress, returns for non-dividend paying firms increase
relative to dividend-paying firms and abnormal returns disappear. We argue that part of the reason that
firms in financial-distress have high volatility that leads to low returns is managerial risk-shifting that takes
form as unexpectedly high capital expenditure rates.
JEL: G12, G32, G33, G35
KEYWORDS: Equity Returns, Dividends, Financial Distress, Volatility, Growth
INTRODUCTION
n perfect capital markets, Miller and Modigliani (1961) show the wealth of a firm’s shareholders is
invariant to corporate dividend policy. Across firms, returns for dividend-paying and non-dividend
paying firms can differ if their corporate financial characteristics differ. The financial literature
identifies several differences between dividend-paying and non-dividend paying firms. Pastor and Veronesi
(2003) report that non-dividend paying firms have high profit volatility, high return volatility, and high
market/book ratios. Fama and French (2001) find that non-dividend paying firms are smaller and less
profitable but have better growth opportunities. Rubin and Smith (2009) characterize non-dividend paying
firms as younger, smaller, and more levered. DeAngelo, DeAngelo and Stulz (2006) find that firms pay
dividends when retained earnings are a large fraction of book-equity, which means that dividend-paying
firms are more profitable. Fuller and Goldstein (2011) report that non-dividend paying firms have higher
returns in advancing markets (and conversely), which means higher leverage. Blazenko and Fu (2010, 2013)
find a positive value-premium for dividend-paying firms but a negative value-premium for non-dividend
paying firms. Investors might reasonably conclude from these differences that non-dividend paying firms
are riskier than dividend-paying firms.
However, Fuller and Goldstein (2011) report that dividend-paying firms have returns that exceed non-
dividend paying firms. We find no statisti.
The impact of managerial incentives on ipo mortality
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Capital structure decisions
This document examines factors that determine capital structure decisions of publicly traded U.S. firms. It finds that the most reliable factors positively associated with leverage are median industry leverage, firm size, intangible assets, and collateral, while the most reliable negative factors are bankruptcy risk, dividend paying status, market-to-book ratio. Less reliably but still generally supported are positive relationships with growth, tax rates, and interest rates, and negative relationships with stock return volatility, net operating losses, profits, and financial constraints.
Klibel5 bus 15
This document discusses factors that affect firm value for public manufacturing firms in Indonesia, including social responsibility, corporate governance, company size, and profitability. It provides background on the relationship between these factors and firm value based on prior literature. Theoretical frameworks discussed that may explain these relationships include agency theory, stakeholder theory, legitimacy theory, positive accounting theory, and signaling theory. The purpose of the study is to develop a new model of the relationships between these exogenous, intervening, and endogenous variables based on these theories and prior empirical research.
Shareholder Activism
Thomson Financial analyzed 75 recent instances of shareholder activism and found mixed results regarding the impact on stock price. Stocks targeted by activists showed higher returns after the activism in both short and long-term, but the results were not always statistically significant. Certain sectors like consumer discretionary were more frequent targets. Activists achieved at least one of their demands 45% of the time, with the highest success rate of nearly 80% for demands to remove the CEO. Stocks of targeted companies outperformed a control group after activism, suggesting shareholder monitoring leads to positive changes. However, the prominence rather than just substance of activism may influence stock prices.
Impact of corporate diversification on the market value of firms
This document summarizes a study that investigates the impact of diversification on the market value of banks in Nigeria. The study hypothesized that diversification does not significantly impact market value. Using regression analysis, the results rejected this null hypothesis and found that diversification does significantly impact market value of banks in Nigeria. Prior literature on the impact of diversification has shown mixed and inconclusive results. Some studies found diversification reduced firm value while others found no relationship or that diversification increased value. The document reviews these mixed findings from prior studies.
F0321035044
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
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Dividend Policy
- 1. Life cycle Theory of the firm How does this theory work on a firm’s dividend policy: when, how much and how often, based on the empirical research.
- 2. Different dividend policy related in different phase of a company Young firms tend not to pay dividend Mature firms tend to pay dividend
- 4. Are dividends changes a sign of firm maturity?Grullon et al. (2002)
- 5. Why firms begin paying dividends: Value, Growth and life cycle effects--Fargherand Weigand (2006) Focus on three established explanations for dividends — signalling, agency costs and risk — and show how these explanations are best understood in the context of Grullon et al. (2002) life cycle hypothesis Although all firms initiating dividends are undergoing a change in their life cycles, the changes are subtly different depending upon whether or not a firm has fully transitioned into its mature phase (low M/B), or is just beginning to show signs of slowing down (high M/B).
- 6. Agency costs Capital expenditures (CAPEX or capex) are expenditures creating future benefits. Like buying a fixed asset or add value to existed assets. findings indicate Jensen's (1986) agency explanation, that firms use dividends to disgorge excess cash to shareholders, applies to all firms, with the high M/B growth firms exhibiting the largest drop in their cash levels. This drawdown of cash does not affect firms‘ capital spending,the ratio of capital expenditure to total assets for any of the M/B quartileshas no change
- 8. Risk Venkatesh (1989), Dyl and Weigand (1998) and Grullon, Michaely and Swaminathan(2002) hypothesize that changes in dividend policy convey information about changes in risk. low M/B value stocks exhibit a decline in systematic risk based on Famaand French's (1993)while high M/B stocks display no change in any systematic risk factors
- 9. signalling Return on assets rises over the three years preceding the initiation of dividends, but declines back to its pre-event level by year +3. This result holds for all the M/B quartiles, which does not support the idea that positive dividend events signal higher future profitability (e.g.,Bhattacharya, 1979; Miller and Rock, 1985; John and Williams, 1985).