Narrow Results

In this contribution, the nonlinear dynamics of the surplus (net assets or reserve) process for a dividend-distributing company is studied in conjunction with the dynamics of its dividend equalization fund. The latter type of fund is maintained by leading insurance companies throughout the world and pays a special dividend for income that the investors lost because the dividend payment process was adversely affected for some or other reason. In our paper, a stochastic model for the related notion of a dividend equalization solvency ratio is derived. The ambient value of this ratio is an indication of the capacity of the insurer to pay dividends to shareholders especially when profit is low. The aforementioned analysis is, in turn, based on the construction of continuous time stochastic models for the dynamics of the surplus and total liabilities processes of an insurer. The discussions are reliant on principles arising within the asset-liability modelling paradigm.

We employ a sample of 3,177 events from Hong Kong industrial firms during the 1993–1999 period to examine insider trading activities around earnings and dividends announcements. By controlling for earnings management, special dividends, and other firm level financial indicators, we find that the presence of insider trading, its trading direction, and its trading intensity are related to the signals of these simultaneous earnings and dividends announcements. Various tests show that our findings are robust regardless of the proxies used for measuring insider trading activities, earnings, and dividend changes.

I argue that paying dividends before issuing new stock can increase the stock price in the case when firms announce dividend payments and new stock issuance contemporaneously. It enables issuing firms to disentangle the agency problem of paying dividends by newly-raised funds from dividend information for new stock issuances. I employ the seasoned offerings of Taiwan listed firms as the sample, because of their practice of paying dividends once a year. The conditional event study strongly supports this argument and explains why previous studies fail to detect the information conveyed by dividends for new stock issuances.

As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.

In this paper, we construct a market equilibrium model to explain why firms repurchase their shares, the popularity of share repurchases compared to dividends, and the preference of share repurchases by institutions and corporate investors despite their tax disadvantage to corporate investors. Share repurchases help shareholders diversify their portfolios, provide firms with flexibility in distributing cash to their shareholders, help institutions and corporate investors take controlling positions in firms, and lead to a rise in share price, benefiting both selling and not selling shareholders through a rise in share price and firms through a low cost of capital.

We examine the relation between the presence of an independent director who is a blockholder (IDB) and corporate policies, risk-taking, and market valuation. After accounting for endogeneity, firms with an IDB have significantly (1) lower levels of cash holdings, payout and research and development (R&D) expenditures, (2) higher levels of capital expenditures, and (3) lower risk. The market appears to value IDB presence and the associated decrease in dividend yield. About 75% of the IDBs in our sample are individual investors, who drive most of our results. Our findings suggest that IDB presence plays a valuable role in shaping some corporate policies and allocating corporate resources.

Using a sample of 17,453 firm-year observations from 1993 to 2017, we find that firms with major customers maintain higher levels of payout flexibility. The positive impact of major customers on payout flexibility is contingent upon cash flow risk, stronger in firms with financial distress, higher cash flow volatility, lower customer switching costs, and greater R&D intensity. The results suggest that major customer-dependent firms tend to pursue more flexible payout policies to maintain or improve their financial flexibility. The results are robust to alternative measures of major customers, the inclusion of additional control variables, and various endogeneity tests.

This study examines whether dividends payout has a positive contribution to firm performance while taking into account the important firm level characteristics such as the divergence between the control rights and the ownership rights of controlling shareholders and firm leverage. Investigating the large firms listed on the Main Board of Hong Kong Stock Exchange over the 1998–2007 period, we find that dividends payout has statistically significantly positive impacts on both return on assets (ROA) and Tobin's Q, particularly after controlling for the nonlinear relation between dividends and firm performance and between control rights of the controlling shareholder and firm performance. The regression results do not show significant interaction effect between dividends payout and control divergence on firm performance. But the impact of dividends payout on firm performance is different in family controlled firms versus state controlled firms and varies with institutional factors.

This paper extends Longstaff and Piazzesi (2004, Journal of Financial Economics, 74, 401–421.) to a habit formation model. By combining corporate fraction ratio, and surplus consumption ratio, we derive closed-form solutions for stock values when dividends, habit ratio and consumption follow exponential affine jump-diffusion processes. We can prove that Longstaff and Piazzesi (2004) is only a special case of our model. In addition, calibrated results show that the corporate fraction and habit ratio to shocks significantly increases the equity premium and decreases the risk-free rate. The model determines realistic values for the equity premium and the risk-free rate.

Using a large sample of U.S. bank holding companies (BHC) from 2000:Q1–2017:Q4, we investigate the impacts of dividend policy to bank earnings management, and document that banks that pay dividends tend to be less opaque than banks that do not pay dividends. The dividend policy not only impacts the conditional average earnings management of banks, but also exerts influence on their dispersion. The impact of dividend policy appears to be more profound for highly opaque banks. We identify different conditions that motivate different discretionary behaviors of banks, which allows us to better observe different managerial motives between dividend-paying and dividend-non-paying banks. Under high information asymmetry context, there is valuably additional information conveyed by paying dividends, and it follows that the role of dividends as a means of conveying information is more pronounced. For banks subject to high agency problems, paying dividends make them to be less opaque through reducing the discretionary behaviors.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo’s (2006) optimal payout policy in terms of the flexibility dividend hypothesis. In addition, we also introduce growth rate, systematic risk, and total risk variables into the theoretical model.

To test the theoretical results derived in this paper, we use data collected in the US from 1969 to 2009 to investigate the impact of growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

The Contingent Claims Analysis (CCA) is a general approach to analyze the stakeholders of a corporation who have contingent claims on the future, uncertain cash-flows generated by the operations of the firms. The CCA allows valuing each stakeholder’s claim and also to assess the risk incurred by the stakeholders. The CCA highlights the potential conflicts of interest among the various claimholders. In this paper, we review applications of CCA including valuation of various forms of debt, rating, credit spread, probability of default and corporate events like dividends, employee stock options and M&A. The CCA framework is shown to be useful to address all these financial questions. In this approach the starting point is that the value and the risk of the firm’s assets are given. The future distribution of the assets’ rates of return is also known and given. The focus is on the liability side of the balance sheet, i.e., the funding sources of the activity of the firm, and more generally on the financial claims of the various claimholders of the firm.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo’s (2006) optimal payout policy in terms of the flexibility dividend hypothesis. We also introduce growth rate, systematic risk, and total risk variables into the theoretical model. In addition, based upon Lee and Alice (2021), we discuss the implication of the existence of optimal payout ratio in financial analysis and decision for a company.

To test the theoretical results derived in this chapter, we use data collected in the US from 1969 to 2009 to investigate the impact of growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

This chapter adopts a behavioral approach to explain why firms prefer dividends over stock repurchases (a tender offer auction) as a payout mechanism despite the significant tax disadvantage that dividends yield. We suggest that different shareholders might have different preferences toward stock repurchases, which may stem from differences in their financial literacy, their diverse discount factors, or from similar other idiosyncratic preferences. This divergence of behavior may lead to differences in the number of shares the various groups of shareholders would agree to sell under the tender offer. If the shareholders cannot coordinate so that they all buy the same number of shares, and if the firm makes an underpriced offer, then a value transfer would occur from those who bought more to those who purchased fewer shares. The stockholders, not knowing a priori to which category they belong, will object to this cash disbursement mechanism and may prefer dividends. This chapter develops a formal two-stockholder model that proves the above assertions.