Dividend Policy Its Impact on Firm Value

by Lease, Ronald C.; John, Kose; Kalay, Avner; Loewenstein, Uri; Sarig, Oded H.

• ISBN13: 9780875844978
• ISBN10: 0875844979
• Format: Hardcover
• Copyright: 1999-11-15
• Publisher: Oxford University Press

Summary

This authoritative guide--the only in-depth survey of dividend policy--challenges the belief that corporate executives and financial analysts should dismiss dividend policy as irrelevant to shareholder wealth. Dividend policy does matter, say the authors, as they cite many classic and contemporary examples to show how dividend policy decisions play out in the marketplace. A carefully planned and executed policy is critical to maximizing shareholder wealth. This accessible, practical book covers every aspect of sound dividend planning and implementation. It includes a brief history of the evolution of dividends, statistics on dividends relative to profits and capital investments, their importance as a component of investor total returns, the relationship of dividends to share price, how management makes dividend decisions, and the impact of different tax regulations on dividend policies. The book focuses less on mathematics and more on the intuition of share valuation as a function of dividend policy. While the authors acknowledge the irrelevance of dividend policy in a world with perfect capital markets, they stress how market imperfections such as taxes, imperfect information, and agency issues can alter the dividend irrelevance conclusion. The book devotes special chapters to international dividend policy and to share repurchases as an alternative to dividend payouts. It concludes with the authors' recommendations on how managers should incorporate market imperfections most relevant to their firms in setting dividend policy. Dividend Policy is a must-have resource for all managers, executives, and institutional investors.

Author Biography

Ronald C. Lease, Avner Kalay, and Uri Loewenstein are Professors of Finance at the University of Utah. Kose John is a Professor of Banking and Finance at New York University. Oded H. Sarig is a Professor at Tel Aviv University.

Table of Contents

Preface	xi
Introduction	1	(18)
Does Anyone Really Pay Attention to Dividends? (Or, Why Should I Care?)	2	(3)
A Short History of Dividend Policy	5	(2)
Summary of the Evolution of Dividends	7	(1)
Profits, Dividends, and Capital Expenditures	7	(5)
Dividend Returns versus Total Common Stock Returns	12	(2)
Dividend Yields	14	(1)
Dividend Declaration	14	(2)
The Dividend Puzzle	16	(1)
Where We Are Headed	17	(2)
Stock Valuation	19	(10)
Capital Gains versus Dividends	20	(3)
Stylized Examples of the Impact of Investment Horizon	20	(1)
The Case of Four One-Year Owners	21	(1)
The Case of One Four-Year Owner	21	(1)
Summary	22	(1)
Common Stock Valuation Example	23	(2)
Dividend Policy and Share Price	25	(4)
Appendix 2A Common Stock Valuation Model	26	(3)
Dividend Policy and Owners' Wealth	29	(16)
What We Really Mean by Dividend Policy	29	(2)
Stylized Examples of Residual and Managed Dividend Policies	30	(1)
Dividend Policy and the Miller/Modigliani Conclusion	31	(3)
The M&M Intuition	32	(1)
What if the share price drops by less than the extra dividend paid?	33	(1)
What if the share price drops by more than the extra dividend paid?	34	(1)
The Dividend Policy Controversy	34	(11)
Appendix 3A Dividend Policy and Owners' Wealth	36	(1)
Miller and Modigliani	36	(1)
Perfect Capital Markets (PCM)	36	(1)
Dividend Policy under PCM and Certainty	37	(5)
Dividend Policy under PCM and Uncertainty	42	(1)
Summary of Dividend Policy under PCM	43	(2)
An Introduction to Imperfect Capital Markets	45	(6)
Homemade Dividends and Costless Financing	46	(1)
Transaction Costs	47	(1)
Qualifications on the Impact of Transaction Costs	47	(1)
Flotation Costs	48	(1)
Behavioral Explanations for Dividend Policy Relevance	49	(1)
Conclusions	50	(1)
Dividends and Taxes	51	(22)
The Tax Environment	51	(2)
Dividend Yields and Risk-Adjusted Returns	53	(3)
The Theory	53	(1)
The Evidence	54	(1)
The Black-Scholes Experiment	54	(1)
The Litzenberger and Ramaswamy Experiment	54	(1)
B&S versus L&R	55	(1)
The Miller and Scholes Critique	55	(1)
The Ex-Dividend Day Studies	56	(7)
The Theory	56	(4)
The Evidence	60	(3)
Ex-Dividend Day and Cross-Sectional Studies	63	(4)
The L&R Experiment Revisited: Time Series or Cross-Sectional Return Variations?	64	(1)
Tax Effects and Time Series Return Variations	65	(1)
Tax-Induced Clienteles: Empirical Evidence	66	(1)
Implications of Ex-Dividend Day Studies	67	(1)
The Case of Citizens Utilities	67	(2)
Conclusions	69	(4)
Dividend Policy and Agency Problems	73	(22)
Agency Relationships	73	(1)
Agency Relationships and Dividends	74	(1)
Shareholders versus Debt Holders	75	(5)
The Differential Impact of Dividends	77	(1)
Dividend Restrictions	78	(2)
Similar Conflicts	80	(1)
Shareholders versus Managers	80	(5)
Ownership versus Control	80	(1)
The Easterbrook Analysis	81	(2)
The Jensen Analysis	83	(1)
Managerial Compensation	84	(1)
Empirical Evidence on Agency Problems and Dividends	85	(3)
Shareholders and Debt Holders	85	(2)
Shareholders and Managers	87	(1)
Conclusions	88	(7)
Appendix 6A The Differential Impact of Dividends on Shareholders and Bondholders	92	(3)
Dividend Policy and Asymmetric Information	95	(24)
Perfect Capital Markets and Information	95	(2)
Signaling Models	97	(7)
Signaling with Dividends	98	(1)
Numeric Examples	99	(1)
``Better'' Firm---No Dividend Case	100	(1)
``Better'' Firm---Dividend Case	101	(1)
``Poorer'' Firm---No Dividend Case	102	(1)
``Poorer'' Firm---Dividend Case	102	(1)
Summary	102	(1)
John and Williams Model	102	(1)
Bhattacharya Model	103	(1)
Miller and Rock Model	103	(1)
Other Theoretical Models	104	(4)
Dividend Smoothing	104	(1)
Dividends versus Share Repurchases	105	(1)
Choice of Signals	106	(2)
Empirical Evidence	108	(4)
Announcement Effects	109	(1)
Changes in Market Expectations	110	(1)
Predictions of Future Earnings	110	(2)
Dividend Signaling Considering Investment Opportunities and Insider Trading	112	(3)
Lang and Litzenberger Study	112	(1)
John and Lang Study	113	(2)
Conclusions	115	(4)
Corporate Dividend Policy Decisions	119	(12)
Dividend Patterns of Individual Firms	119	(3)
The Lintner Survey	122	(3)
A Dividend Change Example	125	(1)
The Lintner Model	125	(1)
The Impact of Dividend Policy on Investment	126	(1)
Dividend Patterns of Individual Firms Revisited	127	(1)
Subsequent Dividend Model Research	128	(2)
Conclusions	130	(1)
Dividend Policy: The Global Perspective	131	(22)
Descriptive Statistics on Dividend Policies around the World	132	(8)
Dividend Size and Frequency	132	(6)
Institutional Features	138	(1)
Tax Differences	138	(2)
Dividend Payout Patterns around the World	140	(2)
Taxes and Dividend Payout Policies in Various Countries	142	(7)
Share-Price Behavior around Ex-Dividend Days	143	(4)
Other Tests for the Tax Effect	147	(2)
Conflict of Interest, Information, and Payout Policy	149	(1)
Conclusions	150	(3)
Common Stock Repurchases: An Alternative to Dividends	153	(26)
Motives for Common Stock Repurchases versus Dividend Payments	154	(3)
Similar Motives	154	(1)
Dissimilar Motives	154	(2)
Survey Results on Common Stock Repurchases	156	(1)
Methods of Common Stock Repurchases	157	(4)
Fixed-Price Tender Offers	157	(1)
Open-Market Repurchases	158	(1)
Dutch-Auction Repurchases	159	(1)
Transferable Put-Right Distributions	159	(1)
Targeted Stock Repurchases	160	(1)
Trends in Common Stock Repurchases	161	(1)
Tax Issues in Share Repurchases versus Dividend Payments	162	(3)
Theoretical Implications of Share Repurchases	165	(4)
Signaling Models	166	(2)
Takeover Defenses	168	(1)
The Empirical Evidence on Share Repurchases	169	(7)
Announcement Period Returns	169	(1)
Share Repurchases as a Signaling Mechanism	170	(2)
Corporate Control Issues	172	(1)
Share Repurchase Interpretations	173	(3)
Conclusions	176	(3)
Management Implications and Conclusions	179	(18)
What Do Managers Think about Dividend Policy?	180	(1)
What Do We Think about Dividend Policy?	181	(2)
The ``Balance Scale'' of Dividend Relevance	181	(2)
The Competing Frictions Model	183	(1)
Individual Market Imperfections	183	(8)
Taxes	183	(3)
Agency Costs	186	(2)
Asymmetric Information	188	(1)
Transaction Costs	189	(1)
Flotation Costs	190	(1)
Behavioral Considerations	190	(1)
Interactions of Market Imperfections	191	(1)
Strategies in Dealing with Market Imperfections	191	(4)
An Example of Competing Frictions Resolution	192	(1)
A Dividend Life Cycle Example	193	(2)
Conclusions	195	(2)
References	197	(10)
Credits	207	(2)
Index	209