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Dividend policy and corporate valuation

Dividend policy and corporate valuation <jats:sec> <jats:title content-type="abstract-subheading">Purpose</jats:title> <jats:p>The purpose of this paper is to investigate an empirical solution to dividend policy relevance.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title> <jats:p>The paper combines measures of firm maturity in a logit regression to define a comprehensive life-cycle model of the likelihood of dividend payment. The valuation of firms that conform to the model is compared to the valuation of firms that do not fit the model. Valuation is measured by the market to book (<jats:italic>M</jats:italic>/<jats:italic>B</jats:italic>) ratio.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Findings</jats:title> <jats:p>The analysis indicates that dividend policy is related to firm value. Dividend-paying firms that fit the life-cycle model have a higher median valuation than dividend-paying firms that do not fit the life-cycle model. Similarly, non-paying firms that fit the life-cycle model have a higher median valuation than non-paying firms that do not fit the life-cycle model. The results also provide evidence that the disappearing dividend phenomenon is related to shifts in valuation.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Research limitations/implications</jats:title> <jats:p>This paper focuses on the payment of dividends. Stock repurchases are not considered.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Practical implications</jats:title> <jats:p>The results indicate that dividend policy is related to firm value. Approximately 15 percent of sample observations have a dividend policy counter to the life-cycle model.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Originality/value</jats:title> <jats:p>This paper shows that the relation between a firm’s <jats:italic>M</jats:italic>/<jats:italic>B</jats:italic> ratio and dividend policy changes over the firm’s life-cycle. It also shows that the catering motive for dividends is strongest among firms that are outliers in the life-cycle model and firms of intermediate maturity.</jats:p> </jats:sec> http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance CrossRef

Dividend policy and corporate valuation

Managerial Finance , Volume 43 (6): 663-678 – Jun 12, 2017

Dividend policy and corporate valuation


Abstract

<jats:sec>
<jats:title content-type="abstract-subheading">Purpose</jats:title>
<jats:p>The purpose of this paper is to investigate an empirical solution to dividend policy relevance.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title>
<jats:p>The paper combines measures of firm maturity in a logit regression to define a comprehensive life-cycle model of the likelihood of dividend payment. The valuation of firms that conform to the model is compared to the valuation of firms that do not fit the model. Valuation is measured by the market to book (<jats:italic>M</jats:italic>/<jats:italic>B</jats:italic>) ratio.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Findings</jats:title>
<jats:p>The analysis indicates that dividend policy is related to firm value. Dividend-paying firms that fit the life-cycle model have a higher median valuation than dividend-paying firms that do not fit the life-cycle model. Similarly, non-paying firms that fit the life-cycle model have a higher median valuation than non-paying firms that do not fit the life-cycle model. The results also provide evidence that the disappearing dividend phenomenon is related to shifts in valuation.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Research limitations/implications</jats:title>
<jats:p>This paper focuses on the payment of dividends. Stock repurchases are not considered.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Practical implications</jats:title>
<jats:p>The results indicate that dividend policy is related to firm value. Approximately 15 percent of sample observations have a dividend policy counter to the life-cycle model.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Originality/value</jats:title>
<jats:p>This paper shows that the relation between a firm’s <jats:italic>M</jats:italic>/<jats:italic>B</jats:italic> ratio and dividend policy changes over the firm’s life-cycle. It also shows that the catering motive for dividends is strongest among firms that are outliers in the life-cycle model and firms of intermediate maturity.</jats:p>
</jats:sec>

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Publisher
CrossRef
ISSN
0307-4358
DOI
10.1108/mf-05-2015-0157
Publisher site
See Article on Publisher Site

Abstract

<jats:sec> <jats:title content-type="abstract-subheading">Purpose</jats:title> <jats:p>The purpose of this paper is to investigate an empirical solution to dividend policy relevance.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title> <jats:p>The paper combines measures of firm maturity in a logit regression to define a comprehensive life-cycle model of the likelihood of dividend payment. The valuation of firms that conform to the model is compared to the valuation of firms that do not fit the model. Valuation is measured by the market to book (<jats:italic>M</jats:italic>/<jats:italic>B</jats:italic>) ratio.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Findings</jats:title> <jats:p>The analysis indicates that dividend policy is related to firm value. Dividend-paying firms that fit the life-cycle model have a higher median valuation than dividend-paying firms that do not fit the life-cycle model. Similarly, non-paying firms that fit the life-cycle model have a higher median valuation than non-paying firms that do not fit the life-cycle model. The results also provide evidence that the disappearing dividend phenomenon is related to shifts in valuation.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Research limitations/implications</jats:title> <jats:p>This paper focuses on the payment of dividends. Stock repurchases are not considered.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Practical implications</jats:title> <jats:p>The results indicate that dividend policy is related to firm value. Approximately 15 percent of sample observations have a dividend policy counter to the life-cycle model.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Originality/value</jats:title> <jats:p>This paper shows that the relation between a firm’s <jats:italic>M</jats:italic>/<jats:italic>B</jats:italic> ratio and dividend policy changes over the firm’s life-cycle. It also shows that the catering motive for dividends is strongest among firms that are outliers in the life-cycle model and firms of intermediate maturity.</jats:p> </jats:sec>

Journal

Managerial FinanceCrossRef

Published: Jun 12, 2017

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