A J-Shaped Cross-Sectional Relation between Dividends and Firm Value
42 Pages Posted: 18 Nov 2015 Last revised: 2 Jul 2016
Date Written: November 16, 2015
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: Suggested Citation