Dividend Policy of German Firms. A Dynamic Panel Data Analysis of Partial Adjustment Models
Cardiff University - Cardiff Business School; European Corporate Governance Institute (ECGI)
Luis Correia da Silva
Oxford Economic Research Associates (OXERA)
Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)
ECGI - Finance Working Paper No. 45/2004
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.
Number of Pages in PDF File: 38
Keywords: Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance
JEL Classification: G32, G35working papers series
Date posted: July 13, 2004
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