Speed of Adjustment in Dividend Payout Decisions: A Comparative Analysis of Developed and Developing Countries
Journal of Corporate Finance Research, Vol. 13, No. 2, pp. 7-24 (2019)
18 Pages Posted: 20 Jul 2020
Date Written: 2019
The analysis of dividends payout policy has been a popular subject of research since the middle of the 20th century. Despite a huge number of investigations there is no consensus opinion as to the best practices in the field. Over the years, different hypotheses have been put forward proposing various methodologies. Some working papers underline share repurchase as the best approach towards payout policy. On the other hand, there are some investigations which emphasize the opposite point of view: that dividends are more preferable. Another explanation states that there is no qualifiable difference in types of payout policy. However, the majority of recent working papers argue that the best approach is to combine share repurchases and dividends. Academic investigations into payout policy began with Lintner’s working paper. This research includes not only financial modeling and results based on regression analysis, but also presents information concerning the preferences of top-management in payout policy decisions. As a result of interviews with top managers, Lintner identified the existence of a target value for dividend payouts. So, managers tried to maintain the share of net income attributed to dividends instead of the value of dividends themselves. Moreover, Lintner found that there is a pertinent speed of adjustment1 in dividend policy. This phenomenon is described by the fact that in case of significant net income changes, firms do not pay all the dividends targeted at a specific level of net income. Companies only adjust the level of dividends in the direction of the changes. Lintner also provided an explanation of this fact. It was noted that companies’ top management was sure that significant changes in dividends can be negatively appraised by the stock market, especially in case of a fall in the value of dividends. So, managers understate the changes in dividends to better assure that next year’s profit can cover the new dividends. However, next year’s net income also incurs some fluctuations, so it it is necessary to make some adjustments to dividends. As a result the process of dividend adjustment becomes permanent. The investigation of Brav et al.  also was devoted to the analysis of payout policy, and included interviews with a large number of CFOs. This research confirms the main results of Lintner’s work, but with some limitations. The study carefully analyzed the existence of any target level in payout decisions. The authors found that only 6% of CFOs do not target dividends at all. However, in contrast to Lintner’s work the majority of CFOs (approximately 40%) answer that their key target is dividends per share. Only 28% try to target a dividends payout, and 27% of managers target dividends per share growth. This investigation shows that nowadays, targeting dividends per share is a more common practice than targeting payouts. Despite the fact that these results display some differences from Lintner’s one, they do not reject the hypothesis about existence of dividend smoothing.
Keywords: speed of adjustment, dividend payout, developing countries
JEL Classification: G32, G35
Suggested Citation: Suggested Citation