Managerial Objectives and Firm Dividend Policy: A Behavioral Theory and Empirical Evidence

JOURNAL OF ECONOMIC BEHAVIOR AND ORGANIZATION, 1995

Posted: 20 Dec 1998

See all articles by Richard Cyert

Richard Cyert

Formerly affiliated with Carnegie Mellon University - Graduate School of Industrial Administration (GSIA)

Praveen Kumar

University of Houston - Department of Finance

Sok-Hyon Kang

George Washington University - School of Business

Abstract

We construct a dynamic model of firm dividend policy based on some basic ingredients of the behavioral theory of the firm, in particular, uncertainty avoidance and sequential decision-making by self-seeking managers. We characterize the optimal dividend policy and show that comparative statics on this policy generate restrictions on the relation of the likelihood of future dividend changes with respect to current real and financial variables such as investments, dividends, and technological parameters that govern the evolution of the economic earnings of the firm, such as the variance and persistence of the systematic shocks on capital productivity. These relations are then empirically tested on NYSE dividend data. The empirical results are supportive of the predictions from the behavioral model. Specifically, current investment, dividend payouts and the return on capital appear to have significant impact on the likelihood of future dividend changes, as do the variance and persistence of capital productivity shocks. In particular, idiosyncratic firm risk is found to have a negative relation to the likelihood of dividend changes. Finally, these variables are shown to impact the likelihood of dividend increases and decreases asymmetrically, a distinction emphasized by the behavioral model.

JEL Classification: D21, G30, G35

Suggested Citation

Cyert (deceased), Richard and Kumar, Praveen and Kang, Sok-Hyon, Managerial Objectives and Firm Dividend Policy: A Behavioral Theory and Empirical Evidence. JOURNAL OF ECONOMIC BEHAVIOR AND ORGANIZATION, 1995, Available at SSRN: https://ssrn.com/abstract=5928

Richard Cyert (deceased)

Formerly affiliated with Carnegie Mellon University - Graduate School of Industrial Administration (GSIA)

N/A

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Sok-Hyon Kang

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

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