Dividend Policy of German Firms. A Dynamic Panel Data Analysis of Partial Adjustment Models
38 Pages Posted: 13 Jul 2004
Date Written: July 2004
Abstract
German firms pay out a lower proportion of their cash flows than UK and US firms. However, on a published profits basis, the pattern is reversed. Company law provisions and accounting policies account for these conflicting results. A partial adjustment model is used to estimate the implicit target payout ratio and the speed of adjustment of dividends towards a long run target payout ratio. We find that German firms do not base their dividend decisions on published earnings, but on cash flows. The reasons for the use of a cash flow-based payout policy are: (i) published earnings figures do not correctly reflect corporate performance as German firms tend to retain a significant part of their earnings to build up legal reserves, (ii) the conservative nature of German accounting policies, (iii) published earnings are subject to a higher degree of smoothing than cash flows. Regarding the speed of adjustment of dividends towards the long term target payout ratio, UK and US companies only slowly adjust their dividend policy whereas German are more willing to cut the dividend in the wake of a temporary decrease in profitability. This causes a higher degree of discreteness in the dividends-per-share time series as opposed to the smoothness (i.e., frequent annual small adjustments in the dividend per share) observed in the US and the UK.
Keywords: Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance
JEL Classification: G32, G35
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Corporate Dividend Policy and Behaviour: The Malaysian Experience
By I. M. Pandey
-
Dividend Policy of German Firms
By Marc Goergen, Luis Correia Da Silva, ...
-
Dividend Behaviour of Indian Companies Under Monetary Policy Restrictions
By I. M. Pandey and Ramesh Bhat
-
Does Dividend Stability Provide a Promising Stock Return? Evidence from Bursa Malaysia
By Fazilah A. Samad, Roselee Shaharudin, ...
-
Dividend Yield and Stock Return in Different Economic Environment: Evidence from Malaysia
-
Factors Influencing Dividend Policy Decisions in Banking Sector: An Indian Evidence
By Dr. Jasvir S. Sura, Karam Pal, ...
-
By Komain Jiranyakul and Jun Jiang