Rational Expectations and the Firm's Dividend Behavior

Posted: 29 May 2013 Last revised: 30 May 2013

See all articles by Alice Orcutt Nakamura

Alice Orcutt Nakamura

University of Alberta - School of Business

Masao Nakamura

University of British Columbia (UBC) - Sauder School of Business

Date Written: November 30, 1985

Abstract

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.

Suggested Citation

Nakamura, Alice Orcutt and Nakamura, Masao, Rational Expectations and the Firm's Dividend Behavior (November 30, 1985). Review of Economics and Statistics, Vol. 67, 1985, University of Alberta School of Business Research Paper No. 2013-262, Available at SSRN: https://ssrn.com/abstract=2270731

Alice Orcutt Nakamura (Contact Author)

University of Alberta - School of Business ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

Masao Nakamura

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8434 (Phone)
604-822-8477 (Fax)

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