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Some basic features of the behavioral theory of the firm can be applied to the development of a dynamic model of firm dividend policy. Uncertainty avoidance and sequential decision making by self-seeking managers were used to construct a decision-theoretic model. Empirical results from New York Stock Exchange dividend data were found to be supportive of predictions from the model. Current investment, dividend payouts and the return on capital as well as the variance and persistence of capital productivity shocks apparently have significant effect on the likelihood of future dividend changes.

During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual-to-stock conversions. We test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress. (Reprinted by permission of the publisher.)

It has been hypothesized that a company's investment behavior may be influenced to a large extent by its dividend policy and liquidity constraints. Recent studies show that such a phenomenon exists in imperfect capital markets. Moreover, controlling for a firm's dividend payment using an alternative Q specification does not diminish the influence of liquidity constraints on firm investment behavior.

An experiment was conducted wherein managers of two firms make decisions regarding investments and dividends to optimize the value of their firms. Dividends are given to shareholders trading in both firms' shares. Unlike in control groups, where dividend and investment decisions are made exogenously to optimize the dividend signal's informational content, dividend surprises in the experimental market are not indicative of the information in earnings shocks. Moreover, firms having low return rates on investment lose earnings power because they underinvest, and managers ineffectively use dividend signals to inflate share prices.

Declarations regarding the payment of stock dividends-in-kind (SDIK) to stockholders are examined to determine their effect on the stock price of the declaree firm. Statistical results show an increase in prices before the announcements and a corresponding decrease after its payment. The findings provide an insight into the behavior of declarer firms wherein said firms declare SDIKs when they think that the price has already reached its peak.

A sample of 145 NYSE companies with declining annual earnings after nine or more years of consecutive positive performance were considered to determine the impact of dividend signaling. The signaling process tested Year 0 dividend decisions to infer managers' future earnings prospects. Favorable dividend decisions were not a reliable predictor of future earnings performance, as negative future earnings were observed even after substantial dividend forecasts were reported.

This study examines the behavior of share prices around the ex-dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre-1988 period when the differential taxation of dividends and capital gains is high, ex-day returns are positive and significant. In contrast, in the post-1988 period, ex-day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex-day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid-ask spread and trading volume, or by the day of the week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex-day share prices in the United Kingdom. (Reprinted by permission of the publisher.)

Researchers have long speculated on the implications of Lintner's dividend model and the present value model of stock prices on the intertemporal behavior of dividends and stock prices. However, there has not been any study conducted to test the implications of the two models. Dependencies between dividends and stock prices are empirically tested using the causal relations between dividends and stock prices implicit in the two models.

A new procedure to evaluate dividend signaling intended to differentiate signaling and other hypotheses of dividend preference was discussed. The procedure uses stock data reactions to dividend announcements. Specifically, the impact of dividend taxation on 'bang-for-the-buck,' described as the share price response for every dollar of dividends, was studied. Recent studies on bang-for-the-buck and dividend variables support the implications of dividend signaling hypothesis.

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short-run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post-dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample., This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short-run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post-dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample. (Reprinted by permission of the publisher.)

The role of dividend announcements in explaining the market reaction's inverse relationship with earnings announcements and the size effect is analyzed. A 1980-1985 random sample of 500 business enterprises from Communications Satellite Corp. is used to determine if a company's size does not have any effect on its dividend payment decisions. Ordinary least squares regression is applied on the weekly returns to estimate the market model. Results show that the size effect is absent if the announcement of dividends is made prior to the earnings announcement.

This article examines the price formation process during dividend announcement day, using daily closing prices and transactions data. We find that the unconditional positive excess returns, first documented by Kalay and Loewenstein (1985), are higher for small-firm and low-priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid-ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax-related ex-day trading. Rather, the price behavior is related to the absorption of dividend information. (Reprinted by permission of the publisher.)

The effect of the accumulated earnings tax (AET) on the dividend payouts of private companies is examined. Using a trade-off model that incorporates external financing cost and agency cost, it is shown that companies optimize their dividend policy by executing a trade off that allows lower agency costs to be balanced against the AET and external financing costs. Data from tax court records provide support for this trade-off model.

In 1936, the Federal Government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower-payout firms. We interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. We also find that despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings. (Reprinted by permission of the publisher.)

The substitutability between debt and dividends as alternative mechanisms for minimizing agency costs of free cash flow is tested for its implication that firms using low debt ratios develop a high-dividend payout policy. The absence of a mechanism for controlling agency costs and its effect on the negative relationship between dividends and managerial ownership is also examined. It is shown that dividend yields and payout ratios are greater for all-equity firms than levered firms.

This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence' presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay., This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay. (Reprinted by permission of the publisher.)

Econometric evidence shows that the Gilt-Equity Yield Ratio (GEYR) is a useful predictor of equity returns in the UK. Market analysts in the UK use GEYR as a means of determining the cheapness of equity investment relative to investment in gilts. The ratio is used to predict future movements in equity prices by using buy/sell thresholds, assuming that there exists a long-run arbitrage relation between the equity market and the government market.

The stock market should try to determine the transitory and permanent components of annual earnings due to the significant association between earnings changes and earnings levels and their impact on security returns. The relation between annual stock returns and annual earnings data is studied using United Kingdom information, with both earnings differences and earnings levels having a substantial explanatory power for security returns, although the earnings level is found to be less important than earnings changes in explaining UK security returns.

A study on the validity of the Easterbrook model is presented. Financing activities, changes in dividend policy and shareholder wealth were used to determine validity. Data were obtained from 490 firms with changed dividend policies that represent either initiation or resumption of cash dividends. Results showed that announcements were related to positive abnormal returns for financing firms. These firms had higher values for return per unit of dividend yield compared to non-financing firms.

A study was made on the effects of the disclosure of dividend increases on the volatility of underlying stock returns as well as the relation of the effects to the label associated with the dividend increase. The behavior of call option prices was analyzed. The results indicated that the announcements of labelled dividend increases are followed by a decrease in implied volatility while the annoucements of unlabelled dividend increases are not accompanied by a change in implied volatility.

This paper shows that the results of variance-bound tests depend on how cash distributions to shareholders are measured. As in prior studies, we find apparent evidence of excess volatility when a narrow definition of cash flow (dividends only) is applied. However, we are unable to reject the hypothesis of market efficiency when the cash flow measure also includes share repurchases and takeover distributions in addition to ordinary cash dividends. (Reprinted by permission of the publisher.)

A study has investigated the behaviour of stable dividend and high yield stocks compared with high-yield only stocks. Previous research has neglected considerations of long-term stability. Results suggest that companies offering high yields and stable dividend payments have different characteristics from companies operating on a high-yield only basis.

The ex-dividend day pricing in the UK is investigated. The equilibrium asset pricing theory used by researchers in past studies of ex-dividend pricing in the US is utilized in the study to assess theeffects of the tax-induced dividend clientele hypothesis and short-term tradinghypothesis on ex-dividend day pricing in the UK. Results indicate that the two major hypotheses on ex-dividend pricing are no longer relevant at present.

A model of managerial decisions on dividend declarationsof Italian firms was presented. Firms may either increase or decrease dividendsdepending on their financial performance. Dividend reduction could be beneficial to both stockholders and the firm since taxes would be lessened and profits would be reinvested. The components of informational content and agent costs in the Italian corporate environment were also discussed. The significantfindings of the model are that Italian firms react faster when they are forced to lessen dividends and that the pay-out ratio for quoted firms are substantially higher than non-quoted firms.

An analysis describing dividend quality dispersion and feasibility is presented. It is shown that under equilibrium conditions, a dividend is not feasible if some firms equate them with high quality signals. Signaling firms must exhibit narrow quality dispersion among themselves for the feasibility condition to hold. Companies should examine explicit quality dispersion limits for determining feasible dividend equilibrium.

An empirical model of the dividend clientele hypothesis is analyzed. The analysis applies data from the 1983 Survey of Consumer Finances and considers individual portfolio sets. It is shown that investor portfolio choices are conditioned by prevailing tax rates. The relationship between portfolio choice and tax rates implies a need for considering security price data for validating the clientele hypothesis.

A study was conducted to evaluate possible explanations for corporate financing-, dividend- and compensation-policy choices. The study reports empirical relations between such corporate policies and integral firm characteristics. Results show that contracting theories best explain the development of corporate regulations compared to tax-based and signaling theories.

The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash-flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for free cash-flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high-Q and low-Q firms. We thus have an empirical puzzle: If Jensen's free cash-flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here. (Reprinted by permission of the publisher.)

Changes in expectations of future dividends, investments and future returns highly account for the variation in aggregate stock returns. A simple time- series model indicates that changes in dividend yield account for 72% of annualstock return variation. Industrial growth rates have also been found to exert marginal pressure on stock returns. A cross-sectional test of 20 portfolio stocks ranked according to their annual return performance show that nearly 90%of the variation in portfolio income is due to dividend and expected return variables.

An analysis of the relation between the weekend effect and corporate dividend announcements. The analysis applies data from a sample of 138,824 dividend announcements covering 3,484 companies for a period of 26 years. It is shown that no evidence supports earlier findings of any impact by the daily pattern of corporate information onreturns. Thus, the return patterns are conditioned by variables other than the information factor.

An analysis of the the dividend capitalization model is presented. Theanalysis focuses on a direct test of the model's descriptive validity by applying principles of capital asset pricing to observe the required return rate. A sample of 35 volunteer liquidating firms offered dividend records for observation as a novel basis for testing capitalization. It is shown that a market exists where these stocks are vital by application of a risk-adjusted dividend capitalization model.

An analysis of the relationship between dividend policy and the bid-ask spread is presented. The analysis focuses on information conveyance of dividend payment to the market, which reduces asymmetry. Extant theories suggest a positive relationship between the level of information assymetry and the range of the spread. It is shown that aninverse relationship exists between the considered variables.

Several puzzling aspects of the behavior of United States stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends. We call bubbles of this type 'intrinsic' bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors. Intrinsic bubbles provide a more plausible empirical account of deviations from present-value pricing than do the traditional examples of rational bubbles. Their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods. (JEL G12)

The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities. (Reprinted by permission of the publisher.)

This paper analyzes the behavior of stock prices around ex-dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long-term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. We show that this tax change had no effect on the ex-dividend stock price behavior, which is consistent with the hypothesis that long-term individual investors have no significant effect on ex-day stock prices during this time period. The results indicate that the activity of short-term traders and corporate traders dominates the price determination on the ex-day. (Reprinted by permission of the publisher.)

This study examines the unit (stock) price and volume behavior of master limited partnerships (MLP) around the ex-dividend day. Since the dividends of MLPs are not taxable to the unitholder, tax based hypotheses predict no abnormal unit movements around the ex-day. Significant positive excess returns and volume are found before the ex-dividend day, and significant negative excess returns are found on the ex-dividend day. The findings which are not significantly impacted by the Tax Reform Act of 1986 suggest ex-day stock movements are not solely a function of investor marginal tax rates or corporate trading behavior. (Reprinted by permission of the publisher.)

This paper develops a theory of choice among alternative procedures for distributing cash from corporations to shareholders. Despite the preferential tax treatment of capital gains for individual investors, it is shown that a majority of a firm's shareholders may support a dividend payment for small distributions. For larger distributions an open market stock repurchase is likely to be preferred by a majority of shareholders, and for the largest distributions tender offer repurchases dominate. (Reprinted by permission of the publisher.)

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecasts errors. This suggests that earnings forecasts errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete. (Reprinted by permission of the publisher.)