Rational Expectations and the Firm's Dividend Behavior
Posted: 29 May 2013 Last revised: 30 May 2013
Date Written: November 30, 1985
In Lintner's model of the dividend behavior of firms the change in dividends is a function of current earnings and the lagged dividends. We show that under a rational expectations hypothesis of management behavior the change-in-dividends equation should include lagged earnings as an additional explanatory variable, and that the expected sign of the coefficient of the lagged earnings variable is positive. Fama and Babiak predicted the opposite sign for a lagged earnings variable in such an equation. Estimation and simulation results based on panel data for U.S. and Japanese firms provide modest econometric support for our Rational model.
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