XXV Edition

1-2 December 2016"

Dividend Decisions of UK Firms: Beyond Agency Theory

Grosman Anna, Aston University
Driver Ciaran, SOAS University of London
Scaramozzino Pasquale, SOAS University of London

This paper reports estimates of UK dividend declarations and dividend payments. We begin by replicating work in previous literature, noting that many of the effects can only be identified under a tight set of maintained hypotheses. This is unsatisfactory, however, because over time, maintained hypotheses such as the form in which agency problems are manifested may change e.g. from a classical managerial agency problem to one in which sets of investors and incentivized managers may be aligned. Furthermore the standard set of assumptions may not apply uniformly across jurisdictions so that the relative importance of debt-based monitoring and the market for corporate control may be reversed. This study questions the identification of the standard models. It proposes a social norms investor pressure theory in which individual firms are targeted to maintain dividends as part of a process of value extraction. In relation to this we identify a set of hypotheses that can be tested using a range of variables from the I/B/E/S databank. An additional contribution of the paper is to consider in tandem the decision to pay dividends and the amount paid; this can best be achieved by Heckman estimation. The results show that perceived investor pressure on firms to disgorge earnings, particularly under conditions of heightened takeover risk is an important determinant of dividend payout. Traditional agency views receive only qualified support and there is only weak evidence for signaling.

Area: Other

Keywords: dividend policy; dividend measurement; dividend specification; investor pressure; estimation methods; UK

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