AUTHOR INDEX OF REVIEWED DIVIDEND ARTICLES

AUTHOR INDEX OF REVIEWED DIVIDEND ARTICLES

SORTED BY AUTHOR

(Author name preceded by article index #)

Ambarish, Ramasastry; John, K; Williams, J

1987

Efficient Signalling with Dividends and Investments

Journal of Finance

Ang, James S., Blackwell, D, Megginson, W

1991

The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains:

Evidence from Dual-Class British Investment Trusts

Journal of Finance

Bailey, Warren

1988

Canada's Dual Class Shares: Further Evidence on the Market Value of Cash Dividends

Journal of Finance

Barclay, Michael J., Smith, C

1988

CORPORATE PAYOUT POLICY: Cash dividends versus Open-Market Repurchases

Journal of Financial Economics

Benartzi, Shlomo; Michaely, R, Thaler, R

1997

Do Changes in Dividends Signal the Future or the Past?

Journal of Finance

Brennan, Michael J, Thakor, A.

1990

Shareholder Preferences and Dividend Policy

Journal of Finance

Chowdhry, Bhagwan; Nanda, V

1994

Repurchase Premia as a Reason for Dividends:

a Dynamic Model of Corporate Payout Policies

Review of Financial Studies

Crockett, Jean; Friend, I

1988

DIVIDEND POLICY IN PERSPECTIVE: CAN THEORY EXPLAIN BEHAVIOR?

The Review of Economics and Statistics

DeAngelo Harry, DeAngelo L

1990

Dividend Policy and Financial distress: An Empirical Investigation of Troubled NYSE Firms

Journal of Finance

DeAngelo, Harry

1991

Payout Policy and Tax Deferral

Journal of Finance

DeAngelo, Harry; DeAngelo, L, Skinner, D

1992

Dividends and Losses

Journal of Finance

DeAngelo, Harry; DeAngelo, L, Skinner, D

1996

Reversal of fortune: Dividend signaling and the disappearance of sustained earnings growth

Journal of Financial Economics

Dhillon, Upinder S., Johnson, H

1994

The Effect of Dividend Changes on Stock and Bond Prices

Journal of Finance

Easterbrook, Frank H.

1984

Two Agency-Cost Explanations of Dividends

American Economic Review

Fama, Eugene F., Babiak, H

1968

DIVIDEND POLICY: AN EMPIRICAL ANALYSIS

American Statistical Association Journal

Hausch, Donald B., Seward, J

1993

Signaling with Dividends and Share Repurchases: A Choice between Deterministic

and Stochastic Cash Disbursements

Review of Financial Studies

Healy, Paul M., Palepu, K

1988

EARNINGS INFORMATION CONVEYED BY DIVIDEND INITIATIONS AND OMISSIONS

Journal of Financial Economics

Hines, James R.

1996

Dividends and Profits: Some Unsubtle Foreign Influences

Journal of Finance

Howe, Keith M., He, J; Kao, G

1992

One-time Cash Flow Announcements and Free Cash-flow Theory:

Share Repurchases and Special Dividends

Journal of Finance

John, Kose; Lang, L.

1991

Insider Trading around Dividend Announcements; Theory and Evidence

Journal of Finance

John, Kose; Williams, J

1985

Dividends, Dilution, and Taxes: A Signalling Equilibrium

Journal of Finance

Lang, Larry HP, Litzenberger, R.

1989

DIVIDEND ANNOUNCEMENTS: Cash flow Signalling vs. Free Cash Flow Hypothesis?

Journal of Financial Economics

Lintner, John

1956

DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS,

RETAINED EARNINGS, AND TAXES

American Economic Review

Michaely, Roni; Thaler, R, Womack, K

1995

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Journal of Finance

Miller, Merton H., Rock, K

1985

Dividend Policy under Asymmetric Information

Journal of Finance

Miller, Merton H., Scholes, M

1978

DIVIDENDS AND TAXES

Journal of Financial Economics

Ofer, Aharon R., Thakor, A

1987

A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement

Methods: Stock Repurchases and Dividends

Journal of Finance

Shefrin, Hersh M., Statman, M

1984

EXPLAINING INVESTOR PREFERENCE FOR CASH DIVIDENDS

Journal of Financial Economics

Williams, Joseph

1988

Efficient Signalling with Dividends, Investment, and Stock Repurchases

Journal of Finance

Yoon, Pyung S., Starks, L

1994

Signaling, Investment Opportunities, and Dividend Announcements

Review of Financial Studies

INDEX OF REVIEWED DIVIDEND ARTICLES (30 Total)

DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS, AND

TAXES

Lintner, John

American Economic Review 46, May 1956

DIVIDEND POLICY: AN EMPIRICAL ANALYSIS

Fama, Eugene F., Babiak, H

American Statistical Association Journal, December 1968, pp. 1132-61.

DIVIDENDS AND TAXES

Miller, Merton H., Scholes, M

Journal of Financial Economics 6 (1978) 333-364.

EXPLAINING INVESTOR PREFERENCE FOR CASH DIVIDENDS

Shefrin, Hersh M., Statman, M

Journal of Financial Economics 13 (1984) 253-282.

Two Agency-Cost Explanations of Dividends

Easterbrook, Frank H.

American Economic Review, vol. 74, no. 4, September 1984, pp.650-59.

Dividend Policy under Asymmetric Information

Miller, Merton H., Rock, K

Journal of Finance, vol. 40, 1985, pp. 1031-51.

Dividends, Dilution, and Taxes: A Signalling Equilibrium

John, Kose; Williams, J

Journal of Finance, vol. 40, no. 4, 1985, pp. 1053-70.

A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock

Repurchases and Dividends

Ofer, Aharon R., Thakor, A

Journal of Finance, vol 42, no. 2, June 1987, pp. 365-395.

Efficient Signalling with Dividends and Investments

Ambarish, Ramasastry; John, K; Williams, J

Journal of Finance, vol. 42, no. 2, June 1987, pp. 321-43.

EARNINGS INFORMATION CONVEYED BY DIVIDEND INITIATIONS AND OMISSIONS

Healy, Paul M., Palepu, K

Journal of Financial Economics 21 (1988) 149-175.

CORPORATE PAYOUT POLICY: Cash dividends versus Open-Market Repurchases

Barclay, Michael J., Smith, C

Journal of Financial Economics, 22 (1988) 61-82.

DIVIDEND POLICY IN PERSPECTIVE: CAN THEORY EXPLAIN BEHAVIOR?

Crockett, Jean; Friend, I

The Review of Economics and Statistics, 1988, pp. 603-613.

Efficient Signalling with Dividends, Investment, and Stock Repurchases

Williams, Joseph

Journal of Finance, vol. 43, no. 3, July 1988, pp. 737-47.

Canada's Dual Class Shares: Further Evidence on the Market Value of Cash Dividends

Bailey, Warren

Journal of Finance, vol. 43, no. 5, December 1988, pp. 1143-60.

DIVIDEND ANNOUNCEMENTS: Cash flow Signalling vs. Free Cash Flow Hypothesis?

Lang, Larry HP, Litzenberger, R.

Journal of Financial Economics, 24 (1989) 181-191.

Shareholder Preferences and Dividend Policy

Brennan, Michael J, Thakor, A.

Journal of Finance, vol. 45, no. 4, September 1990, pp. 993-1018.

Dividend Policy and Financial distress: An Empirical Investigation of Troubled NYSE Firms

DeAngelo Harry, DeAngelo L

Journal of Finance, vol. 45, no. 5, December 1990, pp. 1415-31.

Payout Policy and Tax Deferral

DeAngelo, Harry

Journal of Finance, vol. 46, March 1991, pp. 357-68.

The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains: Evidence from

Dual-Class British Investment Trusts

Ang, James S., Blackwell, D, Megginson, W

Journal of Finance, vol.46, no. 1, March 1991, pp. 383-99.

Insider Trading around Dividend Announcements; Theory and Evidence

John, Kose; Lang, L.

Journal of Finance, vol. 46, no. 4, September 1991, pp. 1361-89.

Dividends and Losses

DeAngelo, Harry; DeAngelo, L, Skinner, D

Journal of Finance, vol. 47, no. 5, December 1992, pp. 1837-63.

One-time Cash Flow Announcements and Free Cash-flow Theory: Share Repurchases and Special

Dividends

Howe, Keith M., He, J; Kao, G

Journal of Finance, vol. 47, no. 5, December 1992, pp. 1963-75.

Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic

Cash Disbursements

Hausch, Donald B., Seward, J

Review of Financial Studies 1993 vol. 6, no. 1, pp. 121-154.

The Effect of Dividend Changes on Stock and Bond Prices

Dhillon, Upinder S., Johnson, H

Journal of Finance, vol. 49, March 1994, pp. 281-89.

Repurchase Premia as a Reason for Dividends: a Dynamic Model of Corporate Payout Policies

Chowdhry, Bhagwan; Nanda, V

Review of Financial Studies 1994 vol. 7, no. 2, pp. 321-350.

Signaling, Investment Opportunities, and Dividend Announcements

Yoon, Pyung S., Starks, L

Review of Financial Studies 1995 Vol. 8, No. 4, pp. 995-1018.

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Michaely, Roni; Thaler, R, Womack, K

Journal of Finance, vol. 50, no. 2, June 1995, pp. 573-608.

Dividends and Profits: Some Unsubtle Foreign Influences

Hines, James R.

Journal of Finance, vol. 51, no. 2, June 1996, pp. 661-89.

Reversal of fortune: Dividend signaling and the disappearance of sustained earnings growth

DeAngelo, Harry; DeAngelo, L, Skinner, D

Journal of Financial Economics 40 (1996) 341-371.

Do Changes in Dividends Signal the Future or the Past?

Benartzi, Shlomo; Michaely, R, Thaler, R

Journal of Finance, vol. 52, no. 3, July 1997, pp. 1007-34.

ARTICLES

Title

Author(s)

Journal, date

Sections

Sections Reviewed

Area

Theoretical/Empirical

DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS, AND

TAXES

Lintner, J

American Economic Review, May 1956

Intro, 1-2

Div.

Empirical

Level 1

Partial adjustment model explains corporate dividend policy

Level 2

Interviews with management teams of a diverse group of 28 companies points to a partial

adjustment dividend process. Managers adjust dividends toward a target payout ratio while

avoiding dividend reversals. Target ratio and speed of adjustment depend on a number of

exogenous factors.

Level 3

The "companies' existing dividend rate continued to be a central bench mark for the problem in

managements' eyes."

Most managers believed that "stockholders prefer a reasonably stable rate and that the market

puts a premium on stability", thus most "sought to avoid making changes in their dividend rates

that might have to be reversed." Partial adjustments, based on current earnings, were used to

avoid dividend reversals.

Managements believed dividend payments constituted a fairness issue for stockholders. Managers

believed that stockholders understood the relationship of earnings to dividends, thus reinforcing an

equilibrium relationship.

Current earnings, and the rates of partial adjustments, are the driving force behind any dividend

policy changes. Two-thirds of the companies had a target payout ratio (mode 50%, most w/in

40-60%). Payout ratios and speed of adjustment were very stable, for a given company, across

time, and depended on a long list of factors.

"[D]ividends were uniformly considered [by management] in terms of annual periods."

Managers subordinated their liquidity position to their dividend policy.

Basic regression equation (tested on only 28 companies) is:

Change in dividend(t) = constant1 + constant2( ideal div.(t) - div(t-1) ) + error(t)

DIVIDEND POLICY: AN EMPIRICAL ANALYSIS

Fama, E; Babiak, H

American Statistical Association Journal, December 1968

1-7

Div.

Empirical

Level 1

Provides empirical support for adding prior year's earnings to Lintner's partial adjustment regression

equation.

There is not much of additional interest here since "much of the novelty of the paper is

methodological."

DIVIDENDS AND TAXES

Miller, MH; Scholes, MS

Journal of Financial Economics 6 (1978)

1-4

1,2

Div.

Theoretical

Level 1

Investors can use homemade techniques to offset effects of dividend policy

Level 2

The authors sketch "a simple model in which the seeming tax discrimination against dividends is

completely neutralized." Strong Invariance Proposition: "given the firm's investment decision, the

firm's dividend decision will have no effect on the wealth or economic welfare of its shareholders."

Level 3

Labels corporations as having a "seemingly masochistic dividend payout policy." Cites the

clientele explanation for dividends as weak.

Investors can undo the tax effects of dividends by i) increasing borrowing (and thus generating tax

deductible interest payments) and ii) investing the proceeds in (risk-free) tax exempt insurance

policies. The deductible interest payments reduce the tax exposure from the dividend income.

EXPLAINING INVESTOR PREFERENCE FOR CASH DIVIDENDS

Shefrin, HM; Statman, M

Journal of Financial Economics 13 (1984)

1-8

1-3,6-8

Div.

Theoretical

Level 1

"[D]ividends and capital cannot be treated as perfect substitutes."

Level 2

"In the absence of taxes and transaction costs, the perfect substitutes feature forms the basis of

dividend irrelevancy." Some "investors would be willing to pay a premium for cash dividends

because of self-control reasons, the desire to segregate, or the wish to avoid regret."

Level 3

Can apply principal agent theory to show why some investors--who are irrational by classical

standards--need dividend paying stocks. They lack the will power to only consume a modest

amount of income. They live by the rule "only consume dividends." This self-imposed constraint (by

their internal "principal") avoids the more costly disutility of containing the "agent" side of their

personality through shear will power.

On the other hand, prospect theory shows that agents may be sensitive to the form in which they

are paid (i.e. dividends vs. capital gains may be valued jointly or individually) as opposed to just

caring about substance (i.e. NPV of sum of dividends and capital gains).

Two Agency-Cost Explanations of Dividends

Easterbrook, FH

American Economic Review, September 84

Intro, 1-4

Div.

Theoretical

Level 1

Offers agency-cost explanations of dividends

Level 2

"Dividends exist because they influence the firms' financing policies, because they dissipate cash

and induce firms to float new securities."

Level 3

Agency costs, including managerial risk aversion, are attenuated by managers who must

constantly raise capital. By raising capital managers subject themselves to the scrutiny of

investment bankers and other capital market intermediaries. Also, "New investors are better than

old ones at chiseling down agency costs."

A consistent presence in capital markets enables the firm to frequently adjust its debt/equity ratio,

enabling a time-consistent sharing of risk between debt and equity holders. "…the securities of

firms simultaneously paying dividends and raising new money will appreciate relative to other

securities."

There are other devices that perform the same agency-reducing role; but dividends may be a

lower-cost means of reducing agency costs.

Dividend Policy under Asymmetric Information

Miller, MH; Rock, K

Journal of Finance, 1985,40

Intro, 1-3

Intro, 1,2-,3

Div.

Theoretical

Level 1

Signaling model in which insiders have incentives to manipulate dividend announcement effects for

short term gain.

Level 2

Firm insiders seeking short term profit have an incentive to declare unwarranted dividends, thus

temporarily increasing its stock price. They can only increase the firm's net dividend (financing held

constant) by cutting investment. Outside investors expect such false signals and discount them

appropriately. Failure to signal in this manner is then viewed as bad news. So a second-best

dividend and investment policy results.

Level 3

The "now thoroughly documented evidence of dividend-announcement effects" clearly implies

informational asymmetries between the investing public and the firm's decision makers.

With a net dividend approach (net dividend equals dividends paid less incremental borrowing), net

dividend announcements supply missing information about the firm's current earnings, which are

then extrapolated to form forecasts of firm value. Financing announcements are viewed as negative

net-dividend announcements.

"When trading is admitted to the model along with asymmetric information, the consistency of the

full-information optimum investment and dividend policies can no longer be taken for granted."

Author's model management as optimizing an objective function giving weight both to those with

short and long term interest in the firm's stock price. This leads to the signaling equilibrium

mentioned above.

Dividends, Dilution, and Taxes: A Signalling Equilibrium

John, K; Williams, J

Journal of Finance, 1985

Intro. 1-4

Div.

Theoretical

Level 1

Dissipative (taxable) dividend signaling by informed insiders prevents stock-price dilution by firms

raising new equity

Level 2

With investment held constant, firm needs to raise capital by issuing shares. But asymmetric

information implies that current stock price is undervalued, thus selling shares dilutes current

shareholder's wealth. Firms optimize dividend level by balancing costs of additional taxes versus

reducing dilution (share price increases with dividends).

Level 3

Shareholders pay income tax on dividends. Outsiders can perfectly audit the firm's current cash

flow and earnings, but are imperfectly informed of value of future projects.

In a separating equilibrium, firms with more favorable inside information pay higher dividends, have

higher share prices, and have to sell fewer new shares to raise capital.

Management maximizes the value of the firm to its current shareholders. Maximization occurs

given the existence (taken as given) "of a pricing function, P, which induces corporate insiders to

signal truthfully with dividends", where the firm's market price is a function of its dividend.

Authors show the existence of "a pricing function for the firm's stock, P, which compensates

sufficiently only stockholders of truly more valuable firms to induce their insiders to signal with

larger dividends."

A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock

Repurchases and Dividends

Ofer, AR; Thakor, AJ

Journal of Finance, June 87

Intro, 1-4

Intro., 4

Div.

Theoretical

Level 1

Managers signal firm value by share repurchases and/or dividends

Level 2

Authors attempt to provide "an integrated theory of informationally motivated cash-distribution

activities." The signaling cost structure favors share repurchases. Firms with large

undervaluations will signal with share repurchases and will provoke a larger share price

announcement effect.

Level 3

Authors note these stylized facts:

i) dividend increases and stock repurchases are followed by announcement effects

ii) stock purchases tend to engender higher stock price increases than dividends

iii) repurchasing firms buy their stock at a premium

iv) after repurchase completion, the stock price declines somewhat but remains higher than the

prepurchase price

Some of the major findings of their model:

i) "both dividends and repurchases will generally be used as signals…neither dominates the

other under all circumstances."

ii) repurchases convey relatively greater signal strength than dividends

iii) firms paying only dividends never use outside financing to do so

Authors note that all signaling models rely on some form of managerial utility maximization. Thus

"our model seems particularly suited to relatively small firms in which insiders can be expected to

have sizeable stock holdings."

Efficient Signalling with Dividends and Investments

Ambarish, R; John, K; Williams, J

Journal of Finance, June 87

Intro, 1-4

Intro,1,2-,3-,4

Div.

Theoretical

Level 1

Firms signal their productive opportunities through both dividends and investments

Level 2

In an asymmetric information environment, outsiders lack knowledge of productivity of firm's current

assets, or of firm's investment opportunities. Since the firm has multiple signals available, and

since dividends face a tax disadvantage, "dividends can then exist in equilibrium only if dividends

and new issues collectively communicate all private information at lower cost than new issues

alone."

Level 3

(Signaling with new stock issues is equivalent to signaling with investment.)

Many features are similar to the John & Williams model (above): shareholders have liquidity

demand for dividends, existence of a separating equilibrium based on a competitively rational

pricing function, insiders maximize wealth of current shareholders, and dividends are dissipative.

The major difference is that insiders now have access to two control variables, dividends and

investment. Thus the market pricing function (taken as given) now has two arguments. One result

is that "In equilibrium, many firms both distribute dividends and deviate from first-best investment."

Empirical implications include: dividends increase stock prices, some firms pay dividends while

others don't, some simultaneously sell new shares while paying dividends. The announcement

effect of new investment depends on whether the firm has private information mainly about assets

in place (negative) versus information about future investment opportunities (positive).

EARNINGS INFORMATION CONVEYED BY DIVIDEND INITIATIONS AND OMISSIONS

Healy, PM Palepu, KG

Journal of Financial Economics 21 (1988)

1-4

1,3-,4

Div.

Empirical

Level 1

"[I]nvestors interpret announcements of dividend initiations and omissions as managers' forecasts

of future earnings changes."

Level 2

Dividend initiations: i) are surrounded, before and after, with positive earnings changes; ii) provide

announcement date returns that are correlated to future earnings growth; iii) favorably update

investor's expectations of future earnings growth. "Managers appear to consider past, current, and

future earnings performance when they decide to initiate or omit cash dividends."

Level 3

This paper provides "strong support for Lintner's (1956) description of managers' dividend

decision-making process, and the dividend information hypothesis proposed by Miller and

Modigliani (1961)."

Results are imparted with caveat that dividend initiation/omission results are "relatively rare

changes" and that conclusions may not extrapolate to the population of dividend policy changes.

Firms that initiate dividends experience changes in equity earnings in excess of firms in similar

industries, of (3.8%, 2.6%, and 5.8%) in the years (0,1,2) following dividend initiation.

Comment: I might temper the characterization of these conclusions (especially ii) and iii) above)

from "strong"; it seems like many of the t-statistics were borderline or insignificant.

CORPORATE PAYOUT POLICY: Cash dividends versus Open-Market Repurchases

Barclay, MJ; Smith, CW

Journal of Finance, 22 (1988)

1-4

Div.

Theor./Empirical

Level 1

Repurchases do not dominate cash dividends

Level 2

Share repurchases inflict lower taxes on shareholders than dividends, but are not the preferred

payout method. Model shows that, when self-interested managers have inside information, share

repurchase programs lead to a higher bid-ask spread for the firm's stock. Dividends avoid these

costs and are thus not dominated by share repurchases.

Level 3

For 1983-86, approx. 80% of firms paid dividends but only 10% repurchased shares (on average

each year). The percentage of equity paid out for dividends (repurchases) averaged 4.3% (1.2%).

Using a market microstructure framework, the authors argue that informationally advantaged

managers' participation in the secondary market increases the number of informed traders vs.

liquidity traders. Market makers lose money on trades to informed traders and must react by

increasing the bid-ask spread. This increases the firm's cost of capital and reduces the firm value.

On the other hand, if there were no asymmetries, increased purchases by the firm would tend to

reduce the bid-ask spread (the firm would "compete" with the market maker for share purchases).

Data show that the average relative bid-ask spread rises from approx. 1.3% (before stock

repurchase) to a peak of approx. 1.7% after the repurchase, supporting the asymmetrical

information hypothesis. Rough calculations show the potential loss in firm market value, due to the

change in the spread, as 7%.

The threat of (uninformed) shareholder expropriation via bid-ask spread leads to a higher company

cost of capital and loss of market value, thus deterring managers from employing repurchases.

DIVIDEND POLICY IN PERSPECTIVE: CAN THEORY EXPLAIN BEHAVIOR?

Crockett, J; Friend, I

The Review of Economics and Statistics, 1988

1-5

1,3,4-,5

Div.

Empirical

Level 1

Reviews progress in explaining the dividend puzzle.

Level 2

Emphasizes the "failure of the payout ratio to rise significantly in response to declining tax rates in

the post-World War II period." Article also stresses the inapplicability of signaling models to

explaining "real-world dividend behavior."

Level 3

Dividends paid to non-corporate investors exceeded $80b in 1988.

"Available evidence indicates that tax clientele effects are surprisingly weak" with institutional

portfolios having similar dividend yield as the market, despite their low tax rates.

"Regression analysis…shows tax rates to be at best marginally significant as a determinant of

payout ratios…"

Efficient Signalling with Dividends, Investment, and Stock Repurchases

Williams, J

Journal of Finance, July 88

Intro, 1-3

Div.

Theoretical

Level 1

Extends prior signaling models by adding continuum of firms, financial assets, and endogenizing

the insider's choice problem.

Level 2

"In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests

in risky real assets to maximize net present value, holds no financial securities, and sells new

stock in the market. This firm finances its value-maximizing investment first from internal funds

and second from stock sold to new investors."

Level 3

The insider's choice problem is similar to Miller and Rock (JOF, 85, see above) except now that

shareholder's have also to solve a portfolio problem.

The production technology, F(I)x, is multiplicatively separable in investment (I) and the insider's

private information (x).

In this model, firms achieve the first-best investment level and "distribute dissipative dividends to

support the sale of stock" for same reason as the above models (insiders maximize current

shareholders' wealth).

Canada's Dual Class Shares: Further Evidence on the Market Value of Cash Dividends

Bailey, W

Journal of Finance, December 88

Intro, 1-4

Intro, 1, 4

Div.

Empirical

Level 1

No evidence for preference of cash dividends over capital gains

Level 2

Canadian law allowed sample firms to issue 2 classes of equity having same priority and voting

rights but differing in the means of payout and tax treatment. Class A shares received dividends,

Class B received payouts in the form of deferred capital gains or stock dividends. In a small

sample (9 firms), Class A shares sold at a premium, but such differences were attributable to

transaction costs and factors unrelated to shareholder preferences.

"No evidence exists that investors prefer cash income to equal amounts of capital gains."

DIVIDEND ANNOUNCEMENTS: Cash flow Signalling vs. Free Cash Flow Hypothesis?

Lang, LHP; Litzenberger, RH

Journal of Financial Economics, 24 (1989)

1-5

1,2-,3-,4-,5

Div.

Empirical

Level 1

Data from dividend announcements support the free cash flow hypothesis

Level 2

Tests the "cash flow signalling and free cash flow/overinvestment explanations of the impact of

dividend announcements on stock prices." Data support the free cash flow hypothesis versus the

cash flow signaling hypothesis.

Level 3

Jensen's free cash flow hypothesis implies that, for firms that overinvest and have lower value (i.e.

Tobin's Q <1), share price increases should accompany dividend increases since greater dividends

imply less cash available for overinvesting. On the other hand, value-maximizing firms (i.e. Tobin's

Q >1) should be affected less by announcements of dividend changes since they already invest

optimally.

Paper looks at dividend changes of at least 10% and compares absolute values of price & dividend

changes .

Average daily returns for 429 dividend-change announcements 1979-84 show only a .3% absolute

change for firms with Q>1 and an average 1.1% change for firms with Q<1, consistent with both

free cash flow and signaling hypotheses. (For the signaling hypothesis, firms with Q>1 are

unaffected by good news due to existing favorable expectations.)

The signaling hypothesis predicts that a dividend decrease would be very significant for a firm with

Q>1, reflecting bad news. However, the daily return was a statistically insignificant -.3% for such

bad news events, contradicting the signaling hypothesis.

Shareholder Preferences and Dividend Policy

Brennan, MJ; Thakor, AV

Journal of Finance, September. 90

Intro., 1-5

Intro, 1, 5

Div.

Theoretical

Level 1

Theory of choice on how to distribute cash to differentially informed shareholders

Level 2

Firms can distribute cash to shareholders via dividends, open market repurchases (OMRs), or by

tender offer repurchases (TORs). Since shareholders are differentially informed, and the firm's stock

price doesn't fully reflect private information, "less well informed shareholders [are] vulnerable to

expropriation by the better informed" if the firm uses OMRs and TORs.

Level 3

Note that pro-rata share repurchases are treated by the IRS as dividends.

Dividends are an equalizer of sorts: they are costly in terms of taxes, but they reduce inequities

inherent in stock repurchases.

The environment includes fixed costs of obtaining private information, thus large shareholders hold

an informational advantage: "…smaller shareholders tend to prefer dividends provided that their tax

rates are not too high."

Results: i) firms payout small amounts via dividends, medium amounts via OMRs, and large

amounts via TORs ii) if dividend tax rates aren't too high, shareholders with low holdings prefer

dividends

Dividend Policy and Financial distress: An Empirical Investigation of Troubled NYSE Firms

DeAngelo H; DeAngelo L

Journal of Finance, December 90

Intro, 1-4

Intro, 4

Div.

Empirical

Level 1

Impact of distress on firm's dividend policy

Level 2

In sample of 80 NYSE firms in distress, "Almost all sample firms reduced dividends…dividends are

cut more often than omitted." Managers reluctant to omit dividends, especially if there exists a

long dividend history.

Level 3

"Some dividend reductions seem strategically motivated" to enhance bargaining, e.g. organized

labor.

"…more than half the sample apparently faced binding debt covenants in years they reduced

dividends." But voluntary dividend reductions were still a large part of the sample.

"…managers…responded to financial distress with early and aggressive dividend reductions," with

typical cuts in dividends of 70%. Managers of the sample firms typically state that dividend cuts

were a result of current or expected losses, low or declining earnings, or to conserve cash.

Payout Policy and Tax Deferral

DeAngelo, H

Journal of Finance, March 91

Intro, 1-4

Intro, 1,2,4

Div.

Theoretical

Level 1

General equilibrium argument favors dividends despite their tax disadvantages

Level 2

Deferring payouts can eliminate the tax burden facing dividends. However, deferred payout by firms

across the board implies deferred consumption. "Since tax deferral and consumption are

inherently jointly supplied goods, an excess aggregate supply of future consumption would result if

firms…adopted low or zero payout policies to capture tax deferral benefits."

Level 3

This article addresses the question: "Why do firms make taxable payouts when they can

(assuming unlimited supply of zero NPV projects) simply reinvest and continuously defer taxes?" It

does not address the share repurchase puzzle: "Why do firms pay dividends instead of repurchase

stock?"

There is a "widespread misperception that the optimal level of dividends is zero in a world with tax

penalties on cash payouts."

"The ultimate market clearing point…will reflect society's demand for current (t=1) versus future

(t=2) consumption flows." Since this is a general equilibrium argument, individuals can't achieve

the social optimum through homemade solutions (e.g. borrowing against future consumption).

The social optimum takes into account other sources of present and future consumption (e.g.

wages, partnership returns).

The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains: Evidence from

Dual-Class British Investment Trusts

Ang, JS; Blackwell, DW; Megginson, WL

Journal of Finance, Mar 1991

Intro, 1-4

Intro, 1,4

Div.

Empirical

Level 1

Provides evidence for existence of tax-related dividends clienteles

Level 2

As the British tax system changed its treatment of capital gains vs. ordinary income, so did the

relative valuation of cash paying versus stock paying shares, providing evidence for the existence of

tax-related dividend clienteles.

Level 3

Sample of 12 British investment trusts (improved over Bailey (JOF, 88): fewer transaction costs,

more firms, more direct linkage between tax effects and relative prices of stock shares vs. dividend

shares) who paid out 100% of earnings as dividends (no signaling effects).

During the period of favorable capital gains tax treatment (1969-1971), "shares paying scrip

dividends sell at a premium above shares paying cash dividends of equal pre-personal tax value."

During 1975-1982 scrip (stock) dividends were taxed as ordinary income (no tax advantage versus

dividends). As a result, cash shares now sold at a premium, "and we observe virtually complete

conversion of scrip shares into cash shares." The change in relative valuation, from the favorable

capital gains regime, was approximately 12%.

Insider Trading around Dividend Announcements; Theory and Evidence

John, K; Lang, LHP

Journal of Finance, September 1991

Intro, 1-5

Intro, 4-,5

Div.

Theoretical/Empirical

Level 1

Publicly observed insider trading may compete with dividends as a signal to financial markets

Level 2

Model derives an equilibrium where an optimum mix of insider trading and dividend changes signal

the firm's prospects. Empirical results suggest that the market uses insider trading data to properly

interpret dividend changes.

Level 3

Major elements of the model are similar to Miller & Rock (85). But here insiders have information

on the quality of the investment opportunity set (vs. current earnings). Thus "dividend policy

changes initiated by growth firms may be interpreted by the market differently from those initiated

by mature firms."

Data on dividend initiations show that the "announcement effect (1-day excess return) for the

insider selling group is about 2.2% less than that of the remaining group." Thus insider trading

affects the market's reaction to dividend initiations.

Dividends and Losses

DeAngelo, H; DeAngelo, L; Skinner, DJ

Journal of Finance, December 92

Intro, 1-6

Intro, 1, 6

Div.

Empirical

Level 1

Assesses the role of poor earnings in determining dividend reductions

Level 2

"[A]n annual loss is essentially a necessary, but not sufficient, condition for dividend reductions in

firms with established earnings and dividend records." About half of the loss firms reduced

dividends during the initial loss year (1980-1985) vs. 1% for non-loss firms. Among loss-firms,

dividend reducing firms "typically experience greater future earnings problems than do

non-reducers."

Level 3

Lintner (1956) "finds that a firm's bottom line net income is the key determinant of dividend

changes". Fama and Babiak (1968) also stress current and past earnings. M&M (1961) suggest

that dividend changes depend on management's earnings expectations.

85 of 167 loss firms reduced dividends in the initial loss year--25 omitted dividends. "Logit

analysis …indicates that the presence or absence of a loss has explanatory power over and above

earnings levels or changes."

"Dividend reductions occur significantly less often when losses include unusual income items

such as special writedowns associated with corporate restructurings."

One-time Cash Flow Announcements and Free Cash-flow Theory: Share Repurchases and Special

Dividends

Howe, KM; He, J; Kao, GW

Journal of Finance, December 92

Intro, 1-4

Div.

Empirical

Level 1

As opposed to Lang & Litzenberger's (89) observations on dividends, evidence supports information

signaling hypotheses vs. free cash flow theory for one-time cash disbursals

Level 2

Following Lang & Litzenberger (89), firms were designated as either high or low Tobin's Q. The free

cash flow hypothesis predicts that overinvesting firms (low-Q) should experience positive excess

returns following one-time cash flow announcements. But the data show no significant difference

upon announcement and thus introduce an empirical puzzle because both dividends and tender

offer buybacks have similar cash flow effects.

Level 3

The "one-time cash flows" were tender offer share repurchases and specially designated dividends

(1979-1989) for firms having no other major events in the 20 days surrounding the announcement.

Two-day risk-adjusted excess returns were (for all firms) 7.47% for tender offer repurchases and

3.44% for special dividends. Segregating firms by Tobin's Q (<1.0 vs. >1.0) gives excess returns of

(7.64%, 7.17%) for tender offer repurchases and (2.84%, 3.97%) for special dividends. Neither of

these were statistically significant from each other.

The authors offer managerial entrenchment as a potential explanation of why the free cash flow

hypothesis fails here. Low-Q firms that repurchase stock, instead of experiencing favorable

returns, are viewed by the market as having value-reducing management with greater personal

ownership percentage that is harder to displace.

Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic

Cash Disbursements

Hausch, DB; Seward, JK

Review of Financial Studies 1993 Vol 6 No. 1

Intro, 1-3

Intro, 1-,3

Div.

Theoretical

Level 1

Considers the choice between deterministic and stochastic cash disbursements for efficient

signaling

Level 2

Managers maximize both current and future share price by selecting stochastic or deterministic

cash disbursement signals that depend on a characteristic of the firm's production function similar

to absolute risk aversion. With increasing absolute risk aversion, the high quality firm

distinguishes itself via deterministic disbursements (i.e. dividends).

Level 3

The firm's internally generated cash flow, X, is unobservable in a single period model. Let X=XH -

C, where C is cash disbursed, XH is unobservable internally generated cash flow by the

high-quality firm (as opposed to XL) and X is invested in the firm's production function F(X).

In this uncertain cash flow environment, managers are compensated for both current and future

share prices and thus have an incentive to signal a firm's high quality cash flow.

Then R_A(X) = - F''(X)/ [F'(X)-1] is the "absolute risk aversion measure of the function F(X) + XH - X."

"If RA(X) is increasing (decreasing) in X, then the high-quality firm prefers to signal using

deterministic (stochastic) disbursements alone." This makes sense since a more concave

production function inflicts a greater penalty for a given level of C. As (normalized) concavity

increases, stochastic disbursements are even more costly.

A second thread of this paper investigates implications of manager's uncertainty (over shareholder's

reservation prices for the firm's equity) in the design of share repurchase auctions. Not of prime

importance for our purposes.

The Effect of Dividend Changes on Stock and Bond Prices

Dhillon, US; Johnson, H

Journal of Finance, March 94

Intro, 1-3

Div.

Empirical

Level 1

Evidence supports hypothesis that dividend increases represent transfers from bond to stock

holders

Level 2

Both the information content hypothesis and the wealth transfer hypothesis predict that stock

prices should rise in response to a dividend increase. In contrast, the wealth transfer hypothesis

predicts that bond prices should fall in response to dividend increases and is supported by the

data.

Level 3

Mean excess two-day returns for stocks and bonds (respectively) show, for dividend increases

(+1.53%, -.14%) and for dividend decreases (-3.47%, +0.63%). The opposition in sign supports

the wealth transfer hypothesis.

(Note: the author's state that the evidence "does not rule out the information content hypothesis"

but they don't discuss this conclusion any further. Perhaps the data were not sufficiently strong for

them to come to such a strong conclusion.)

Repurchase Premia as a Reason for Dividends: a Dynamic Model of Corporate Payout Policies

Chowdhry, B; Nanda, V

Review of Financial Studies 1994, Vol. 7, No. 2

Intro, 1-4

Intro, 1-, 4

Div.

Theoretical

Level 1

Share repurchase programs, although tax advantaged, may be expensive to implement

Level 2

The strong favorable price increases following announcement of a share repurchase program may

make such programs too costly. Long-term shareowners gain increased ownership of the firm, but

the costs of buying out fellow shareholders may make dividends attractive. Managers dynamically

optimize the costs of paying dividends, carrying cash across time, and the premiums paid to

repurchase shares.

Level 3

Managers act in the interest of long-term shareholders (those who remain after a share repurchase

tender offer) and have better information on the evolution of firm value.

"Firms carry cash through time so as to be able to distribute it in the form of repurchases at

appropriate times." Managers will undertake share repurchases when the firm is significantly

undervalued by the market.

Major implications:

i) firms pay dividends, but only repurchase shares infrequently (i.e. they await undervaluation)

ii) dividends, cash retained, increasing in the quantity of accumulated cash

iii) dividends are smoothed (firm doesn't payout all earnings increases, but waits for repurchase)

Signaling, Investment Opportunities, and Dividend Announcements

Yoon, PS; Starks, LT

Review of Financial Studies 1995 Vol. 8, No. 4

Intro, 1-6

Intro, 3-, 6

Div.

Empirical

Level 1

Cash flow signaling (vs. the free cash flow hypotheses) better explains wealth effects surrounding

dividend announcements

Level 2

After controlling for more variables, the evidence counters Lang & Litzenberger's (89) support of the

free cash flow hypothesis. Furthermore, dividend increases are followed by capital expenditure

increases. The free cash flow hypothesis, as opposed to the cash-flow signaling hypothesis,

predicts the opposite: a reduction in capital expenditure by overinvesting firms.

Level 3

The three-day cumulative average abnormal return for dividend (increases, decreases) was:

q<1

(+1.54%, -5.30%)

q>1

(+0.67%, -4.60%)

All figures were significant. The free cash flow hypothesis predicts no change for firms having q>1,

whereas the cash flow signaling hypothesis predicts that all four numbers should be significant.

As opposed to Lang & Litzenberger (1989), after controlling for "the size of the dividend change, the

anticipated dividend yield, and the market value of the firm, there is no difference in the magnitude

of stock price reactions to dividend announcements across firms with different investment

opportunities" (i.e. Tobin's Q).

Article also tests reactions of analysts estimates of both current and future earnings to dividend

changes. Both dividend increases and decreases affect current earnings forecasts. But future

earnings forecasts only change in response to dividend decreases. This is "generally consistent

with the cash flow signaling hypothesis."

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Michaely, R; Thaler, RH, Womack, KL

Journal of Finance, June 1995

Intro, 1-7

Intro, 7

Div.

Empirical

Note: This article focuses on market reactions, not on managers, so the following review is very brief.

Level 1

The market underreacts to dividend omissions

Level 2

Short run prices react more strongly to dividend omissions than initiations, but the reaction is

similar if one controls for the magnitude of the changes. There exist "significant long-term drifts

following announcements of initiations and especially omissions."

Level 3

Market-Adjusted excess return percentages, for omissions and initiations, relative to

announcement date:

3-day

3 month

1 year

3 year

Initiations

3.4

1.8

7.5

24.8

Omissions

-7.0

-4.6

-11.0

-15.3

"[W]e can find no evidence of important changes in volume or clientele, which mitigates price

pressure as a potential explanation for the anomalous drift."

Dividends and Profits: Some Unsubtle Foreign Influences

Hines, JR

Journal of Finance, June 96

Intro, 1-6

Intro,1,2,3-,5,6

Div.

Empirical

Level 1

Dividend payout rate on foreign profits is three times higher than domestic profits

Level 2

Foreign profits may be more difficult to verify than domestic profits and thus may require stronger

dividend signals.

Level 3

Foreign profits as % of total U.S. profits have increased from approx. 10% in 1955 to 40% in 1985.

Dividend payout ratios have also increased (common dividends as % of after-tax profits) to about

0.6 in 1985 from approx. 0.4 in 1960.

(The payout ratio figures do not include any adjustment for share repurchases--rising during the

80s--so total disbursements are actually higher than 0.6)

Reversal of fortune: Dividend signaling and the disappearance of sustained earnings growth

DeAngelo, H; DeAngelo, L; Skinner, DJ

Journal of Financial Economics 40 (1996)

1-9

1,8-,9

Div.

Empirical

Level 1

Assesses empirical importance of dividend signaling

Level 2

"Our tests yield no indication that favorable dividend decisions represent reliable signals of superior

future earnings performance for these firms." Data also supports hypotheses that 1) managers

tend to be overly optimistic about growth 2) dividend increases tend to be relatively small, and thus

noncredible

Level 3

Sample consists of 145 NYSE firms "whose annual earnings decline after nine or more consecutive

years of growth." 99 of 145 firms increased dividends in year 0. "The median sample firm has

17.9% annualized earnings growth over the five years before the initial (Year 0) earnings Decline.

"Year 0…marks the transition from a sustained growth phase to a period in which most firms have

essentially zero earnings growth."

From annual reports, "stockholder letter of only seven firms (4.9% of the sample) indicate that

managers are not optimistic about firm prospects."

"[D]ividend-increasing firms have zero average abnormal stock performance over Years 1-3",

indicating that the subsequent poor performance was anticipated in Year 0 and suggesting that the

market paid no heed to the dividend increase.

Do Changes in Dividends Signal the Future or the Past?

Benartzi, S; Michaely, R; Thaler, R

Journal of Finance, July 97

Intro, 1-6

Intro, 2-,6

Div.

Empirical

Level 1

Find only "limited support" for idea that dividends contain future earnings information

Level 2

Evidence supports Lintner's model: "there is a strong past and concurrent link between earnings

and dividend changes", but "the predictive value of changes in dividends seems minimal."

Level 3

"Firms that increase dividends in Year 0 have experienced significant earnings increases in years

-1 and 0, but show no subsequent unexpected earnings growth."

Industry-Adjusted Mean Earnings Changes (significant=bold)

Dividend Change

Yr. 0

Yr. 1

Yr. 2

Decreases

-5.13

5.04

0.20

No Change

0.00

Increases: quintile 1

0.08

0.20

-0.48

quintile 2

0.94

0.52

-0.71

quintile 3

1.77

1.40

-0.55

quintile 4

2.02

1.01

-0.62

quintile 5

3.38

-0.07

-0.37

"Firms that increase dividends have significant (though modest) positive excess returns for the

following three years." Thus the signal, if it exists, is not getting through.