Dividend Policy of German Firms. A Dynamic Panel Data Analysis of Partial Adjustment Models

38 Pages Posted: 13 Jul 2004

See all articles by Marc Goergen

Marc Goergen

IE Business School, IE University; European Corporate Governance Institute (ECGI)

Luis Correia da Silva

Oxford Economic Research Associates (OXERA)

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Date Written: July 2004

Abstract

German firms pay out a lower proportion of their cash flows than UK and US firms. However, on a published profits basis, the pattern is reversed. Company law provisions and accounting policies account for these conflicting results. A partial adjustment model is used to estimate the implicit target payout ratio and the speed of adjustment of dividends towards a long run target payout ratio. We find that German firms do not base their dividend decisions on published earnings, but on cash flows. The reasons for the use of a cash flow-based payout policy are: (i) published earnings figures do not correctly reflect corporate performance as German firms tend to retain a significant part of their earnings to build up legal reserves, (ii) the conservative nature of German accounting policies, (iii) published earnings are subject to a higher degree of smoothing than cash flows. Regarding the speed of adjustment of dividends towards the long term target payout ratio, UK and US companies only slowly adjust their dividend policy whereas German are more willing to cut the dividend in the wake of a temporary decrease in profitability. This causes a higher degree of discreteness in the dividends-per-share time series as opposed to the smoothness (i.e., frequent annual small adjustments in the dividend per share) observed in the US and the UK.

Keywords: Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance

JEL Classification: G32, G35

Suggested Citation

Goergen, Marc and Correia da Silva, Luis and Renneboog, Luc, Dividend Policy of German Firms. A Dynamic Panel Data Analysis of Partial Adjustment Models (July 2004). Available at SSRN: https://ssrn.com/abstract=563621 or http://dx.doi.org/10.2139/ssrn.563621

Marc Goergen

IE Business School, IE University ( email )

Finance Department
Maria de Molina, 12
Madrid, 28006
Spain

HOME PAGE: http://www.ie.edu/business-school/faculty-and-research/faculty/marc-goergen/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Luis Correia da Silva

Oxford Economic Research Associates (OXERA) ( email )

Alfred Street
Oxford OX1 4EH
United Kingdom
+44 (01865) 251 142 (Phone)

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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