The Dividend Policy of German Firms

38 Pages Posted: 2 Sep 2008 Last revised: 1 Oct 2008

Christian Andres

WHU - Otto Beisheim School of Management

André Betzer

BUW- Schumpeter School of Business and Economics

Marc Goergen

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

Luc Renneboog

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

Date Written: August 4, 2008

Abstract

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.

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

JEL Classification: G32, G35

Suggested Citation

Andres, Christian and Betzer, André and Goergen, Marc and Renneboog, Luc, The Dividend Policy of German Firms (August 4, 2008). CentER Discussion Paper Series No. 2008-67; TILEC Discussion Paper No. 2008-27; ECGI - Finance Working Paper No. 216/2008. Available at SSRN: https://ssrn.com/abstract=1262171 or http://dx.doi.org/10.2139/ssrn.1262171

Christian Andres

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

André Betzer

BUW- Schumpeter School of Business and Economics ( email )

Gaußstraße 20
Wuppertal
Germany

HOME PAGE: http://finance.uni-wuppertal.de/index.php?id=1153

Marc Goergen

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

Luc Renneboog (Contact Author)

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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