Rethinking Lintner: An Alternative Dynamic Model of Dividends

Abstract

For six decades empirical modeling of dividends has been dominated by the partial adjust-
ment model of Lintner (1956). Lintner's model suers from the logical paradox that if companies
have target payout ratios, in the steady state those companies will have reached those target
ratios. Moreover, Bond and Mougoue (1991) demonstrate that Lintner's model is poorly spec-
ied when earnings are serially correlated. We propose and test an alternative dynamic model
of dividend payout. Cross-sectional Tobit regression results are consistent with the predictions
of the model and time series tests show that the model succinctly describes the empirical data.

Keywords: Dividend Policy, Lintner Model, Empirical, Time Series, Dynamic Model, Cross-Sectional TOBIT Regression

JEL Classification: G30, G35, C21, C22, C31, C32, C33, C34