On the Timing of Dividend Initiations

Abstract

We study the timing and significance of dividend initiations in the life cycle of a firm. We follow a sample of firms from their IPO, and using a hazard model of dividend initiations, examine which firm characteristics are important in predicting initiations. We find that dividend initiators are large and stable firms with relatively high profitability and low growth rates. In this mature stage of their life cycle, these firms generate a lot of cash, but do not find many profitable investment opportunities. Although initiators are mature firms, the event of initiation itself does not signal maturation since neither profitability nor risk changes significantly in the six years around initiation. Exploring further, we find that while reaching maturity increases a firm's propensity to initiate dividends, the firm is also concerned with the premium (or penalty) that attaches to dividend paying stocks. Thus, controlling for life cycle factors, the timing of the initiation and the positive announcement effect are partly explained by the market sentiment for dividends

Keywords: Dividend Initiations, Maturity Hypothesis, Dividend Premium

JEL Classification: G35