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Dividend Policy of German Firms


Marc Goergen


Cardiff University - Cardiff Business School; European Corporate Governance Institute (ECGI)

Luis Correia da Silva


Oxford Economic Research Associates (OXERA)

Luc Renneboog


Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

November 2004

CentER Discussion Paper Series No. 2004-122

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 - pershare 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: 33

Keywords: Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance

JEL Classification: G32, G35

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Date posted: January 5, 2005  

Suggested Citation

Goergen, Marc and Correia da Silva, Luis and Renneboog, Luc, Dividend Policy of German Firms (November 2004). CentER Discussion Paper Series No. 2004-122. Available at SSRN: http://ssrn.com/abstract=642402 or http://dx.doi.org/10.2139/ssrn.642402

Contact Information

Marc Goergen (Contact Author)
Cardiff University - Cardiff Business School ( email )
Colum Drive
Cardiff, CF10 3EU
United Kingdom
HOME PAGE: http://www.cf.ac.uk/carbs/faculty/goergenm/index.html
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Luis Correia da Silva
Oxford Economic Research Associates (OXERA) ( email )
Alfred Street
Oxford OX1 4EH
United Kingdom
+44 (01865) 251 142 (Phone)
Luc Renneboog
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Tilburg Law and Economics Center (TILEC)
Warandelaan 2
Tilburg, 5000 LE
Netherlands
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