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Recent empirical studies have shown that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that solely focuses on incumbents when measuring the effects of debt on investment. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

This paper investigates whether the equity market anticipates dividend changes that have large value effects in the days leading to the announcements. In particular, I partition dividend changes into those with large and small value effects based on dividend and firm characteristics and study the abnormal returns preceding the changes by the two groups. T-tests are used to test the difference in mean abnormal returns preceding dividend changes by the two groups, and regression techniques are used to test whether this difference is equal to the corresponding difference for firms that maintain dividends. The results show that the abnormal returns preceding dividend changes that have large value effects are not different from those preceding dividend changes that have minimal value effects or, if there is a difference, it is statistically similar to the corresponding difference preceding unchanged dividends. Thus, it does not appear that the equity market exploits the price effect of dividend changes that have large value effects in the days leading to the events. This contrasts evidence that shows that the equity market anticipates corporate events that have large price effects in the days proximal to the events.

This paper examines corporate tax avoidance involving Dutch special purpose entities (SPEs), or shell companies. We use unique data of the SPEs including the origin and destination country of dividend, interest, and royalty flows passing the Netherlands. First, we present descriptive statistics of these flows which amount to 140 billion euro in 2016. Second, we collect national tax data on the corporate income tax and fiscal treatment of these flows. By combining tax parameters with bilateral flows, we can assess the potential tax gains for multinational enterprises using Dutch SPEs. We find massive tax savings for royalties when Dutch SPEs are used as an intermediate station compared to direct flows between the origin and destination country. We measure this tax gain at almost 3 billion euro in a single year. However, we do not find such tax savings for dividends and interest. We explain where we lack information and hence cannot measure possible tax gains. In regression analysis, controlling for country characteristics, we find that tax differentials partially explain the geographical patterns of income flows diverted through the Netherlands. This paper is one of the first using bilateral income flows as dependent variables instead of FDI stocks or flows.

We explore the determinants and value implications of publicly traded real estate companies converting to real estate investment trusts (REITs), which we term REITing, and publicly-traded REITs giving up their REIT status, termed de-REITing. Non-REIT real estate firms that pay relatively high dividends and have high income tax ratios are more likely to convert to a REIT; while REITs that have lower pretax incomes, dividend adjusted operating cash flows, and higher leverage ratios are significantly more likely to de-REIT. REITing generates significant positive abnormal returns (ARs) around the REITing announcement. These positive ARs are concentrated in firms with higher income tax liabilities and firms paying larger dividends pre REIT-conversion. De-REITing announcements generate significant negative ARs, which are mitigated when the de-REITing firm has low potential tax liabilities, or when the firm is cash flow constrained with respect to its dividend payment. Based on these results, we argue that the degree to which REITing (de-REITing) decisions are value generating (destroying) depends on the magnitude of potential tax and dividend implications. We also examine the longer run valuation effects of REITing and de-REITing decisions and find no evidence of a reversion of the short-run announcement effects.

The information and communication technology, represented by the broadband Internet, has made a profound impact on Chinese urban labor market. However, the effect of broadband Internet on inter-city inequality is less well documented, especially concerning income inequality. This study aims to identify the impact of broadband Internet on income distribution between cities in China and further explore its underlying mechanisms. Based on nationally representative subsamples from the census in 2005, 2010 and 2015, we find broadband Internet is a blessing factor in explaining the inter-city income gap. The conclusion remains stable after overcoming the endogeneity issues with instrumental variables. Interestingly, broadband Internet appears to provide digital dividend for the low-income brackets. Notably, broadband Internet seems to be skill-biased, since it favors highly educated and professional workers, as well as China’s eastern and central regions. Market potential and manufacturing agglomeration are two mechanisms underlying the reducing effects of broadband Internet. These findings provide insights that are valuable for designing policies and strategies aimed at ensuring fairness and efficiency in broadband Internet development.

We estimate a regime-switching model for the equity term structure with Bayesian methods. Our approach accounts for the data sample being unrepresentative of the population distribution of regimes. We find that ( i ) the term structure of expected equity dividend strip returns is downward sloping in recessions and upward sloping in expansions, and ( i i ) the unconditional term structure of expected equity returns is positively sloped. Our estimation shows that the sample unrepresentativeness induces a downward bias in the estimate of the equity term structure slope. We present a regime-switching consumption-based asset-pricing model that matches the empirical findings.

The average annual inflation-adjusted amount paid out through dividends and repurchases by public industrial firms is more than three times larger from 2000 to 2019 than from 1971 to 1999. We find that an increase in aggregate corporate income accounts for 37% of the increase in aggregate annual payouts, and an increase in the payout rate accounts for 63%. Firms have higher payout rates in the 2000s not only because they are older, larger, and have more free cash flow, but also because they pay out more of their free cash flow. Though firms spend less on capital expenditures in the 2000s than before, capital expenditures decrease similarly for firms with payouts and for firms without.

In this paper, we study a dividend maximisation problem for a Brownian risk model as a surplus and a Markov-switching model describing the preference rate of an insurer. The preference rate can attain two values – a positive and a negative. The negative preference reflects the situation when the uncertainty prevails and the insurer shows more waiting tendency. In the times of the positive preference the insurer is in modus operandi. We solve the problem of finding the optimal dividend payout strategy for the setting with a classical ruin concept as well as for the case of a Parisian ruin with an exponential delay. In the first case, the optimal strategy turns out to be of a barrier type for the positive preference rate and no dividends are paid in the times of the negative rate. The optimal barrier increases with increasing intensity to switch into the state with a negative preference and shows the inverse dependence on the counterpart intensity. In the case of Parisian ruin, the optimal strategy depends on the parameter of the ruin delay and the severity of the negative preference rate. If the expected delay is relatively short the optimal strategy remains a barrier (even equal to zero) in the positive state with no dividends being paid in the negative state. If the expected delay is long, the optimal strategy in the negative state might change from not paying dividends to a band strategy. We give explicit expressions for the value functions and present conditions determining the type of the optimal strategy. Both problems are illustrated by examples.

We examine how the introduction of credit default swap (CDS) trading on the debt of individual firms affects corporate payout policy. We find that firms increase payouts to shareholders after the introduction of CDS trading on their debt. This suggests that CDS-referenced firms determine payout policy in response to decreased creditor monitoring rather than apply more conservative policies to avoid renegotiations with tougher CDS-insured creditors. Moreover, the increase in payouts after CDS introduction is more pronounced in firms with smaller institutional ownership and greater bank debt dependency. Finally, we show that firms tend to repurchase stocks rather than increase dividends when they increase payouts after the introduction of CDS trading. (JEL G32, G35)

Purpose The purpose of this paper is to test the validity of irrelevant theory empirically by exploring the relationship between cash dividends, profitability, leverage and investment policy with the value of banking institutions in the Middle East and North Africa (MENA) markets. Design/methodology/approach The paper adopts Ohlson’s (1995) valuation model. The author estimates models by using static panel (random and fixed effects) techniques and the dynamic technique, namely, the GMM estimation. The empirical study covers a sample of 122 conventional and 37 Islamic banks listed on stock markets in 12 MENA countries over the period 1999–2018. Findings The empirical results show that dividend yield has no significant association with the value of conventional banks, whereas profitability, growth opportunity and leverage have a significant positive impact on the value of conventional banks. In contrast, the results for a sample of Islamic banks indicate that the dividend yield, profitability and leverage have a significant positive effect on the value of Islamic banks, whereas growth opportunity has no significant effect on the value of Islamic banks. Therefore, these results support, to a greater extent, the validity of the dividend irrelevance theory of Modigliani and Miller for conventional banks but would not be accepted for Islamic banks in the MENA region. Research limitations/implications This study is restricted to a sample of one type of financial firms, banking firms listed in the MENA countries. In addition, the study has dealt with one type of dividend (the cash dividend). Practical implications Highlighting the difference between conventional and Islamic banks is crucial to understanding dividend policy behavior and to providing investors information to be integrated in their valuation setting to make informed corporate decisions. Originality/value To the best of the author’s knowledge, the present study is the first of its kind that it draws a comparative analysis by testing empirically the validity of the Irrelevant Theory to banks in the MENA region covering a long time period in the recent past.

In contrast to the disappearing dividends view prevalent in the literature, we document extensive dividend payments by firms and significant variability within firms and across 16 countries during 2000–2013. We predict that within-firm variability in dividends increases investor demand for forward-looking dividend information, and analysts respond by producing informative dividend forecasts. We find that analyst dividend forecasts are available for most dividend-paying firms and are more prevalent for firms with higher variability of dividends. Analyst dividend forecasts are more accurate than alternative proxies based on extrapolations of past dividends. Finally, dividend forecasts (1) are incrementally useful to investors beyond information in other fundamentals, such as earnings and cash flow forecasts, (2) help investors interpret earnings quality, and (3) are associated with investors' portfolio allocation decisions. Data Availability: Data are available from the public sources cited in the text.

We study the impact of transparency on stock price informativeness by using an exogenous change in China: the comply-or-explain dividend regulation. Employing a difference-in-difference (DID) desig...

In an asset market without bubbles, meaning the strong efficient markets hypothesis is satisfied, the price and dividend should be cointegrated. However, standard unit root tests have low power against a class of Periodically Collapsing Rational Bubbles introduced by (Evans, Am Econ Rev 81:922–930, 1991), which are an intuitive model of speculative behavior. The cryptocurrency markets for bitcoin, ethereum, and ripple do not have dividends, so the tests are conducted using five different proxies for fundamentals. In most cases the price and fundamental data are integrated of order one, according to a minimum LM test for unit roots that allows for breaks. Using a robust test for cointegration that controls for the skewness and excess kurtosis that could arise with such bubbles, one cannot reject the presence of Period Collapsing Rational Bubbles in any of the cryptocurrency markets. The distribution of such tests is non-standard, so significance levels are determined with Monte Carlo experiments.

This study aims to determine whether companies with surpluses are more capable of maintaining their dividend rate if they issue cash dividends from capital reserves. Further, it considers whether s...

This paper develops a text-based downside risk measure using corporate annual reports and assesses its ability to forecast future corporate policies. The forward-looking measure dynamically captures adverse firm conditions evolving from economic fundamentals. When the measure is below its sample average, leverage, investment, R&D, employment, and dividends consistently fall. When the measure rises, firms increase cash holdings. The proposed measure also delivers robust and persistent forecasts based on in-sample and out-of-sample LASSO regressions.

This paper investigates a combined optimal risk exposure and dividend distribution decision making problem in presence of model uncertainty. In the context of model uncertainty, the decision maker regards the reference model (fitted by observed information) as an approximation to the true model and believes that the true model exists in a family of alternative models surrounding the reference model. The aim is to find a robust strategy of risk exposure and dividend payments, which maximizes the expected cumulative discounted dividends until ruin plus a “penalty” on the distortion between the reference and alternative models in the worst-case scenario. We provide explicit expressions for the value functions and derive the respective optimal strategies explicitly. We show that the optimal dividend strategy is always of a barrier type and that it is optimal to retain full risk when the surplus is large. We also find that when the insurer is more averse to ambiguity, her optimal strategy on risk retention and dividend payout is more conservative.

We use a multi-period equation system to examine how international manufacturing firms allocate internally generated operating cash flow to different uses. With one dollar increase in operating cash flow, firms use about half to reduce external financing and about a quarter to increase cash balances. Another quarter or so is spent on investment and only a tiny portion is paid out as dividends. Furthermore, firms in countries with strong investor protection save less out of operating cash flow and retire more external financing, especially the equity. Additional analysis reveals that the cost of equity capital is lower in firms retiring more external funds and/or saving less. Our study provides a new perspective to evaluate the fund allocation decisions of international firms.

We provide evidence that dividends signal sustainable earnings generated by assets-in-place for firms with weak investment opportunities. In the cross-section, both dividend levels and changes contain more earnings information among firms with weaker investment opportunities. Intertemporally, when aggregate investment opportunities in the economy are worse, dividend changes convey more earnings information. In contrast, dividends have a more negative association with investment spending for firms with strong growth options, as funding investment is a higher priority for those firms. Collectively, our findings suggest that dividends serve as a counter-signal, whereby additional information about investment opportunities give rise to signaling that is non-monotonic in firm quality. JEL Classifications: G15; G32; G35.

Important dimensions of dividend behavior are not well understood. How do dividends behave in extreme states of the world? Why is the risk premium on dividend claims so high? Would dividend bans in crisis states have plausible effects on firms' cost of capital? In this paper we use evidence from the ongoing Corona pandemic to shed light on these questions. We find that, contrary to the folklore that near-future dividends are smoother than earnings or share prices, the opposite is true in disaster states. It appears that firms do not fulfill their role as liquidity intermediaries for their shareholders in precisely those states, in which predictable cash payments would be valued most highly. This is consistent with the apparent puzzle that near-maturity dividend futures have provided investors with "anomalously" high returns in the past years. In light of the recent Corona disaster, these risk premia are consistent with compensation for negative co-skewness and exposure to disaster risk. Our findings imply that policy setters who consider banning dividends in a crisis should take into account the potential effect this is likely to have on firms' future cost of capital.

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.

We develop a structural model of the firm that allows after-interest cash to be directed to dividends, buybacks or some combination thereof. We study the effects of dilutions and buybacks on the value of the firm's claimants and on options written on the stock. We distinguish between options on equity and options on individual shares and value both types. We examine employee stock options and establish how their value changes in accordance with changing payout policies. Our model allows us to quantify and analyze the wealth transfer that occurs from shareholders to holders of employee stock-based contingent claims.

Purpose The purpose of this paper is to examine the moderating effect of corporate governance on the impact of earnings management on dividend policy. Design/methodology/approach In this paper, the authors selected French non-financial companies listed on the CAC All Tradable index during the 2008–2015 period. Feasible generalized least square regression method is used to estimate the econometric models. Findings The empirical results allowed the authors to confirm and/or reject certain hypotheses. First, the ownership concentration seems to positively moderate the impact of earnings management on dividend policy. Another conclusion that the authors have been able to draw is that the effect of earnings management on dividend policy is more favorable in the case of firms with a small director’s board. Practical implications Our results have shown that French firms run earnings to inform the market that they can distribute dividends. Therefore, we recommend that the various partners of the firm pay more attention to the governance mechanisms of these types of companies and, in particular, in countries where foreign investors suffer from weak legal protection (Easterbrook, 1984; Gomes, 2000; La Porta et al., 2000 and Athari et al., 2016). In fact, standardization bodies, the Ministry of Finance, external auditors and stock exchange organizer must focus on sophisticated governance mechanisms to ensure better quality of financial reporting. Originality/value To our knowledge, no other research has examined whether the impact of earnings management on dividend policy varies significantly with the moderating effect of certain governance mechanisms in France.

This paper investigates the impact of the coronavirus disease 2019 pandemic on investors' trading behaviors around ex‐dividend dates in Europe. The sudden decrease in the number of companies paying dividends reduced the opportunities to capture dividends. Thus, the firms that maintained dividend payments during the pandemic attracted more interest than before. This led to a doubling in the magnitude of stock return patterns usually observed around ex‐dividend days. Our evidence indicates that dividend‐seeking investors are likely to be the main driver of the price patterns observed around ex‐dividend dates.

This paper examines how the ownership concentration affects banks’ profitability and dividend policy in Jordan. All banks listed on the Amman Exchange were selected (16 banks) over the period 2010 to 2019. Ownership concentration was defined as the percentage of ownership that equals or exceeds 5%, while profitability was defined by return on equity; dividend policy was defined by the pay-out ratio. Simple regression was utilized to examine the effect; the result revealed that ownership concentration has a positive significant impact on profitability, which means that banks with higher ownership concentration have better profitability, this result justified by the view of the power that controlling shareholders can greatly use to require management to make decisions that improve the performance. The finding showed a negative significant impact on dividend policy, which indicates that the existence of large shareholders can reduce agency conflicts; and maximize the wealth of the company. It is recommended that related parties especially investors should take the concentration of ownership as an important factor to take their investment decisions, whether related to purchasing banks’ shares for various purposes, or expectations of potential dividends.

This study examines the effect of investor-level income taxes on profit repatriation and dividend payout policies of multinational firms. The empirical estimations include two million firm-year observations in 130 countries. By augmenting the Lintner model of dividend payments, I employ parametric as well as semiparametric techniques to provide evidence that income taxes on dividends neither alter dividend payments to investors nor within-firm dividend payments. These results remain robust to a wide range of alternative specifications.

While there is a near global consensus about the need to address climate change, most countries are hesitant to employ sufficiently stringent policies in fear of sacrificing economic growth. The objective of this research is to examine the impact of environmental policy on economic growth, using the OECD’s Environmental Policy Stringency (EPS) index across 21 OECD countries from 1990 to 2014. An augmented Solow Model with the inclusion of variables to represent human capital, trade openness and the EPS index is used to assess whether policy stringency affects growth with empirical analysis comprised of a pooled mean group estimator, dynamic OLS, fixed effects and pooled OLS to estimate the short and long run effects. The results reveal that policy stringency negatively affects economic growth in the short run but pays dividends of positive growth in the long run. There appears to be a threshold level of the EPS, beyond which the dividend is realized in the long run. The results are expected to be of interest to policy makers who strive to address climate change without trading off economic growth.

We study how the relationship between a firm’s growth opportunities and its dividend policies shifts in response to a reduction in information asymmetry between investors and firms. Existing litera...

This article develops a quantitative open economy framework with dynamics, firm heterogeneity and financial frictions to study the impact of corporate tax reforms targeted at multinationals. The model quantifies their impact on firm selection, production and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into selling abroad, through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax as in the Tax Cuts and Jobs Act. The reform’s impact trades-off two selection effects—more offshoring versus greater U.S. business dynamism. The reform leads to higher U.S. welfare at little cost to the Treasury. A series of exercises illustrate that the novel features of this framework have significant quantitative implications. The reform gives starkly different cross-sectional predictions and lower welfare gains when financial frictions are removed and it is welfare reducing in a static counterpart of the model.

The personal traits of chief executive officers (CEOs) have been found to influence corporate policy decisions. We examine the impact of CEO past corporate distress experiences on payout policy. CEOs who have experienced a distress event in their career, while working in a non-CEO position at a different firm, subsequently alter corporate payout policy once in the CEO position. They are less likely to pay dividends and repurchase shares, pay out lower levels of dividends, and are less likely to increase dividends. They further exhibit preference toward repurchases. Overall, we report that experience-driven conservatism affects payout policy, a novel finding in the literature.

Based on panel data from 2000 to 2017 on 30 provinces in China, we analyse the threshold effect of environmental regulation on the quality improvement of economic growth in Eastern, Central, and Western China using a threshold regression model with entrepre-neurship as the threshold variable. The conclusions are as follows: (1) With a low entre-preneurship index, environmental regulation inhibits the quality of regional economic growth. When the entrepreneurship index is at a middle level, the effect changes from an original adverse impact to a favourable impact, which is very significant in Eastern and Western China, but not significant in Central China. When entrepreneurship is highly active, environmental regulation is beneficial to economic growth quality in all regions, and environmental regulation can bring into play the function of "reversed mechanism" to promote economic growth quality. (2) The differences in entrepreneurship level in the three regions lead to regional heterogeneity of the threshold effect between environmental regulation and economic growth quality. Eastern China realizes a double dividend of environmental improvement and economic growth. The entrepreneurial activity in the Central and Western regions is a little far away from their threshold values, at which environmental regulation can produce a significant incentive effect. In conclusion, we put forward three suggestions to improve the entrepreneurial activity and fully realize the double dividend of environmental improvement and economic growth.

This paper describes and analyzes the taxation of capital income in Canada, including the corporate income tax and the taxation of dividends and capital gains at the personal level. The paper then ...

We consider a renewal risk model with general Erlang distributed inter-arrival times. We treat this as a Markov modulated risk model and assume, for simplicity, that the states are observable. The ...

How do macroeconomic events affect the term structure of equity returns? We document that the term structure of equity excess returns is upward sloping on federal fund rate announcement days but not on nonannouncement days. The dividend strips respond significantly to macroeconomic news and the strength of the announcement response declines with the maturity of the dividend asset. Our analysis reveals that nonfarm payrolls surprises have the largest impact on the term structure of dividend strips. The cash flow and discount rate channels both contribute to the response of the dividend asset to macroeconomic news.

The market price-dividend ratio is highly correlated with several macroeconomic variables, particularly inflation and labor market variables, but not with aggregate consumption and GDP. We incorporate this observation in an exchange economy with learning about the economic regime from consumption history and a latent signal. The estimated model rationalizes the moments of consumption and dividend growth, market return, price-dividend ratio, and real and nominal term structures and the low predictive power of the price-dividend ratio for consumption and dividend growth while a nested model with learning from consumption history alone does not. The intuition is that the beliefs process has high persistence and low variance because beliefs depend on the signal. The model fit remains largely intact when we replace the latent signal with a combination of macroeconomic variables that heavily loads on inflation and labor market variables. The results highlight the informational role of macroeconomic variables and suggest that just one combination of macroeconomic variables, along with consumption, proxies well for investors’ relevant information set.

The equity term structure is downward sloping at long maturities. I estimate an Intertemporal Capital Asset Pricing Model (ICAPM) to show that the trade‐off between market and reinvestment risk explains this pattern. Intuitively, while long‐term dividend claims are highly exposed to market risk, they are good hedges for reinvestment risk because dividend prices rise as expected returns decline, and longer‐term claims are more sensitive to discount rates. In the estimated ICAPM, reinvestment risk dominates at long maturities, inducing relatively low risk premia on long‐term dividend claims. The model is also consistent with the equity term structure cyclicality and the upward‐sloping bond term structure.

The authors analyze the dynamics of analysts’ dividend estimates and dividend futures prices and combine them to decompose fluctuations in the equity market into fundamental expectations and discount rate adjustments. Although analysts tend to be overly optimistic about dividends paid over short horizons, the authors find analysts possess skill regarding the direction of future dividend growth. The authors provide evidence that prices of dividend futures are driven more by hedging activity than fundamental views or uncertainty around future cash flows, leading prices to drop significantly below analysts’ expectations and subsequent realized payoffs in times of increased equity market volatility. Looking at the outbreak of COVID-19 and the following Euro Stoxx 50 crash, they find that most of the drop in the equity index was attributable to discount rate adjustments, not fundamental views. Investors can use the methodology the authors present to formulate an alternative view on the drivers behind future market swings. TOPICS:Fundamental equity analysis, derivatives, futures and forward contracts, performance measurement, financial crises and financial market history Key Findings ▪ Consensus dividend estimates for European blue chips tend to be too optimistic during both market crashes and stable times. ▪ Prices of Euro Stoxx 50 dividend futures are affected by hedging activity related to their origin in structured equity products, causing prices to drop significantly below analysts’ expectations and subsequent realized payoffs when markets are volatile. ▪ Using both analyst estimates and the prices of dividend futures allows us to attribute a large fraction of the equity market crash during COVID-19 to discount rate adjustments rather than to changes in fundamental expectations.

In a standard stock loan, the borrower reimburses the lender any dividends paid while the loan is outstanding. Since these substitute dividends may be taxed differently than dividend payments themselves, some investors have incentives to either remove their shares from lendable supply–if they pay high taxes on substitute dividends–or lend out their shares to arbitrageurs–if they pay high taxes on dividends. Consistent with these incentives, we find a significant tightening of the equity lending market on dividend record days driven by both a contraction of supply and an expansion of demand–although the demand effect appears to dominate. We then exploit the plausibly exogenous nature of these shifts to causally link tightness in the lending market to wider effective spreads in the stock market.

Using a laboratory experiment, we investigate whether comovement can emerge between two risky assets, despite their fundamentals not being correlated. The ‘Two trees’ asset pricing model developed by Cochrane et al. (2007) guides our experimental design and its predictions serve as our source of hypotheses. The model makes time-series and cross-section return predictions following a shock to one of the two assets’ dividend distributions. As the model predicts, we observe (1) positive contemporaneous correlation between the two assets, (2) positive autocorrelation in the shocked asset, and (3) time-series and cross-sectional return predictability from the dividend-price ratio. In line with the rational foundations of the model, the model's predictions have stronger support in markets with relatively sophisticated agents.

We use staggered share repurchases legalization from 1985 to 2010 across the world to examine its impact on corporate behaviors. We find that share-repurchasing firms do not cut dividends as a substitution. The cash for repurchasing shares comes more from internal cash than external debt issuance, leading to reductions in capital expenditures and R&D expenses. While this strategy boosts stock prices, it results in lower long-run Tobin's Q, profitability, growth, and innovation, accompanied by lower insider ownership. Tax benefits and paying out temporary earnings are two primary reasons that firms repurchase.

We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents are marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well-documented empirical asset-pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

This paper studies the impact of taxation on corporate investment, debt, equity, and dividends. There is a classical tax code in which the firm pays tax on profits and the investor pays taxes on dividends, interest, and capital gains. We find that a small increase in the dividend tax (or the capital gains tax) has no effects on consumption, production or government revenue. Instead, the firm alters the dividends and share issuance policies. A small increase in corporate profits tax (or a cut in the tax on interest) reduces consumption, increases government revenue, and for realistic tax parameters increases production. There is one approximate symmetry between the impact of corporate profits tax and interest tax, and another between dividend tax and capital gains tax.

Bank dividends are unusually persistent. In a crisis, they exacerbate systemic risk and raise concerns for regulators. Bank managers, however, may keep dividends elevated to mitigate agency conflicts with shareholders. One theory holds that persistent dividends may substitute for monitoring by dispersed shareholders. A second theory proposes that they attract institutional shareholders who monitor banks, mitigate agency conflicts, and seek to protect their investments’ value. After controlling for regulatory enforcement actions, we test both theories using 7722 bank-quarter observations spanning the 2007–2009 financial crisis. Our results suggest that dividend persistence increases with managerial agency conflicts but decreases in the presence of concentrated institutional shareholders, consistent with the second theory. In addition, contrary to the first theory, dispersed shareholders have no influence on bank dividend policies. Instead, these dispersed shareholders are associated with more frequent stock repurchase programs.

This paper evaluates the effects of credit constraints in an asset market experiment with present value considerations induced by interest payments on cash. All markets exhibit price bubbles, with peak prices exceeding the present value of dividends and redemptions by 30–130%. Starting with a baseline condition (low income, tight credit), a relaxation of credit constraints generates significantly higher price bubbles. A price increase of similar magnitude results from an increase in exogenous income, holding credit tightness constant.

Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when banks fund loans with equity and debt. In the model, bank shareholders consider equity costly and a bank’s access to debt depends on its shareholder value. In response to loan losses banks cut dividends, but eventually defer dividends too much. They do not internalize that a commitment to higher dividends (and fewer loans) during recoveries from financial crises would increase shareholder value and access to debt during crises. Constrained-efficient dividends, while restricted during normal times and zero during crises, are higher during recoveries.

We hypothesize that managers use stock dividends or splits to cater to gambling investors who are willing to pay a premium for stocks with lottery-like features. Using proprietary account-level trading records, we find that retail investors, particularly those with a strong gambling preference, become strong net buyers following the announcement of stock dividends, while professional investors unload their holdings. Moreover, we find that positive market reactions to stock dividends is positively associated with increases in gambling investors.

This study places Dubofsky’s (1992) “limit order adjustment hypothesis” under the microscope of an intraday analysis, which employs a minute-by-minute trade and quote data recorded during the ex-dividend days of common stocks listed on NYSE, AMEX and NASDAQ. Dufosky’s (1992) model concluded that the asymmetric adjustment of open limit orders for cash dividend payments under the NYSE and AMEX rules is sufficient to create abnormal returns on the ex-dividend day. Empirical evidence shows that the limit order bias incurred due to the asymmetric adjustment of open limit orders seems to dominate the overnight ex-day returns but at the same time, it is significantly corrected via active trading up until the close of the ex- dividend day. As a result, the significant association of the ex-day price drop discrepancy with the opening limit order bias eventually disappears before the ex-dividend day close. Finally, it is found that the reversal of the limit order bias is in fact quicker in stocks which are more liquid or listed on NASDAQ where strong competition among dealers is envisaged to drive stale quotes closer to the fair adjustment of the dividend.