Financial Management

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Revisiting Managerial Perspectives

on Dividend Policy
H. Kent Baker, Gary E. Powell, and E. Theodore Veit

Methodology
Survey Result
Conclusion

Last Updated: March 15, 2016

Financial Management
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ABSTRACK
We survey managers of Nasdaq firms that consistently
pay cash dividends to determine their views about dividend
policy, the relationship between dividend policy and value,
and four common explanations for paying dividends. The
evidence shows that managers stress the importance of
maintaining 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-thehand explanation. The study provides new evidence about
how managers view dividend life cycles and residual
dividend policy.

Financial Management
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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 theoriessignaling, tax-preference,
agency costs, and bird-in-the-hand
explanations.

Financial Management
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PREVIOUS RESEARCH

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1. Determining a Firms Dividend Polic

y
2. Dividend Policy and Value
3. Explanations for Paying Dividends

Financial Management
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Determining a Firms Dividend Policy

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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 Lintners
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.
Brennans (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 firms 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

Financial Management
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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 & Poors Register of
Corporations and Hoovers 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
questions 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

Financial Management
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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 firms life cycle (S3)

Financial Management
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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

Financial Management
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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)

Financial Management
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CONCLUSION
Results show that respondents from dividendpaying Nasdaq firms strongly agree with
statements supporting Lintners (1956) findings.
Nasdaq managers widely support statements
consistent with the concept that a firms 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

Financial Management
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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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Financial Management
Wassalaamualaikum

STARRING:
Cardison Lumban Batu
Dian Purnomo Jati

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