Dividend Stickiness and Strategic Pooling

Review of Financial Studies, Vol. 23, 2010

59 Pages Posted: 13 Sep 2007 Last revised: 26 Oct 2011

See all articles by Ilan Guttman

Ilan Guttman

Leonard N. Stern School of Business, New York University; New York University - Stern Scholl of business

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 1, 2010

Abstract

We argue that dividend stickiness, the tendency of managers to keep dividends unchanged, implies that managers use a partially pooling dividend policy. We offer a model that demonstrates how such a policy can evolve endogenously in equilibrium. An informed manager who cares about the firm's intrinsic value as well as short-term stock price allocates earnings between investments and dividends. We show that there is a continuum of equilibria in which the dividend is constant for a range of realized earnings. Compared with the standard separating equilibrium, this partial pooling behavior induces higher firm value and lower underinvestment. We offer new empirical implications relating the pooling nature of dividend stickiness to the information environment of the firm, dividend prediction models, managerial incentives, and investment.

JEL Classification: G35, G31, D82

Suggested Citation

Guttman, Ilan and Kadan, Ohad and Kandel, Eugene, Dividend Stickiness and Strategic Pooling (August 1, 2010). Review of Financial Studies, Vol. 23, 2010. Available at SSRN: https://ssrn.com/abstract=1012675

Ilan Guttman (Contact Author)

Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University - Stern Scholl of business ( email )

No Address Available

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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