Why Do Public Companies Begin Paying Dividends?

Posted: 25 Sep 1999

See all articles by Carlos P. Maquieira

Carlos P. Maquieira

University of Chile - Diagonal Paraguay

Marc L. Lipson

University of Virginia - Darden School of Business

William L. Megginson

University of Oklahoma

Date Written: November 1994

Abstract

This paper examines empirically whether the dividend initiation decisions of a sample of newly-public firms are best explained by the predictions of the Miller and Rock (1985) cash flow signalling model, or by the competing agency cost models presented by Easterbrook (1984), Jensen (1986), and Rozeff (1982). Our results strongly support the agency cost models of dividend initiation. We document that dividend-initiating (DI) firms are older, larger, more profitable, and have higher levels of free cash flow at their initiation date than a matched set of non-dividend- initiating (NDI) companies. In the years after initiation, the DI firms issue equity and convertible securities more frequently, have higher levels of free cash flow, and have lower levels of--and greater post-IPO reductions in--insider shareholdings than do the matching NDI companies. These results suggest that firms begin paying dividends as a response to changes in the company's financial success and ownership structure.

JEL Classification: G14, G24, G35

Suggested Citation

Maquieira V., Carlos Patricio and Lipson, Marc Lars and Megginson, William L., Why Do Public Companies Begin Paying Dividends? (November 1994). Available at SSRN: https://ssrn.com/abstract=6084

Carlos Patricio Maquieira V.

University of Chile - Diagonal Paraguay

257 OF 1206
Santiago
Chile

Marc Lars Lipson

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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