The Dividend Policy of German Firms
WHU - Otto Beisheim School of Management
BUW- Schumpeter School of Business and Economics
Cardiff University - Cardiff Business School; European Corporate Governance Institute (ECGI)
Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)
August 4, 2008
CentER Discussion Paper Series No. 2008-67
TILEC Discussion Paper No. 2008-27
ECGI - Finance Working Paper No. 216/2008
German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.
Number of Pages in PDF File: 38
Keywords: Dividend policy, payout policy, target payout ratio, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance
JEL Classification: G32, G35
Date posted: September 2, 2008 ; Last revised: October 1, 2008
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