A J-Shaped Cross-Sectional Relation between Dividends and Firm Value

42 Pages Posted: 18 Nov 2015 Last revised: 2 Jul 2016

See all articles by Soonhong Park

Soonhong Park

Chungnam National University

Soojung Kim

Kyung Hee Cyber University

Jungwon Suh

Sungkyunkwan University (SKKU)

Date Written: November 16, 2015

Abstract

This study identifies a J-shaped relation between dividends and firm value. On average, top-dividend-payers are valued higher than all other firms, while non-dividend-payers are valued higher than low-dividend-payers. This J-shaped relation is highly stable over time as it is observed in nearly every year over the period 1962-2010, and it remains significant after controlling for firm characteristics such as profitability, growth and firm size. We also find similar J-shaped relations in stock markets outside the U.S. Our evidence suggests that dividend theories, such as the dividend catering, free-cash-flow and dividend clientele hypotheses, are inadequate to explain the J-shaped relation. It does not appear that the J-shaped pattern reflects mispricing. There is mixed evidence as to whether the J-shaped relation is driven by dividends or unobservable firm characteristics.

Keywords: firm value, dividends, dividend clienteles, free cash flow, dividend catering hypothesis

JEL Classification: G30, G31, G35

Suggested Citation

Park, Soonhong and Kim, Soojung and Suh, Jungwon, A J-Shaped Cross-Sectional Relation between Dividends and Firm Value (November 16, 2015). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2691794 or http://dx.doi.org/10.2139/ssrn.2691794

Soonhong Park

Chungnam National University ( email )

Korea

Soojung Kim

Kyung Hee Cyber University ( email )

Seoul
Korea, Republic of (South Korea)

Jungwon Suh (Contact Author)

Sungkyunkwan University (SKKU) ( email )

206 International Hall
Seoul 110-745, 110-745
Korea, Republic of (South Korea)

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