Dividends of German firms are often perceived to be more flexible than those of Anglo-American firms. We analyse the decision to change the dividend for 221 German firms over 1984-1993. Consistent with Lintner [Am. Econ. Rev. 46 (1956 97], net earnings are key determinants of dividend changes. However, our findings also refine those of Lintner [Am. Econ. Rev. 46 (1956) 97] and Miller and Modigliani [J. Bus. 34 (1961) 411]. First, the occurrence of a loss is a key determinant of dividends in addition to the traditional key determinant, the level of net earnings. Second, the majority of dividend cuts or omissions are temporary. This stands in marked contrast with DeAngelo et al. [J. Finance 47 (1992) 1837] who report that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis. Finally, we find that firms with a bank as their major shareholder are more willing to omit their dividend than firms controlled by other shareholders. D

Dividends are not only a signal about a firm's prospects under asymmetric information, but they can also act as a corporate governance device to align the management's interests with those of the shareholders. Dividend Policy and Corporate Governance is the first comprehensive volume on the relationship between dividend policy and corporate governance, and examines in detail empirical studies and current theories. Reviewing the interactions between dividend policy and other corporate governance mechanisms, it compares results for the UK and the US with those for other countries such as France, Germany, and Japan, and provides new empirical evidence on corporate governance in continental Europe and its impact on dividends. Focusing on one of the main representatives of this system, Germany, it highlights major differences between the dividend policies of German firms and those of UK or US firms. Conventional wisdom states that German dividends are lower than UK or US dividends, yet on a published-profits basis, the exact converse is true. In addition, the authors demonstrate a link between corporate control structures and dividend payouts, report evidence that the existence of a loss is an additional determinant of dividend changes, and demonstrate that the tax status of the controlling shareholder and the firm's dividend payout are not linked. The conclusions reached in this book have important implications for the current debate on corporate governance, making it invaluable for academics, finance professionals, regulators and legal advisors.

Anecdotal evidence suggests that the dividend policy of German firms is more flexible than the one of their Anglo-American counterparts. This paper analyses the decision to change the dividend for a panel of 221 German firms from 1984 to 1994. The choice of the period of study is motivated by the fact that at the start of this period there was an economic boom which was followed by a recession. Consistent with the traditional dividend literature, e.g. Lintner (1956), net earnings are key determinants of the decision to change the dividend. However, the study comes up with two findings which are contrary to Lintner (1956) and Miller and Modigliani (1961). First, the level of net earnings is not the only key determinant of the dividend decision, as the occurrence of a loss -whatever its magnitude -has an explanatory power exceeding the one of the level of the loss. Second, dividend cuts or omissions tend to be temporary and the majority of German firms quickly (within two years) revert to their initial dividend level. This stands in marked contrast with DeAngelo et al. (1992) who find that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis. Furthermore, the fact that German firms frequently omit and cut their dividend and quickly return to their initial dividend suggests that dividends in Germany have less of a signalling role than dividends in the US and the UK. Our findings also contradict Bhattacharya's (1979) argument that the costs of dividend changes are asymmetric with dividend reductions being more costly to the firm than dividend increases. Finally, we find evidence that firms with banks as their major shareholder are more willing to omit their dividend than firms controlled by other types of shareholder. Acknowledgements When do German firms change their dividends?ABSTRACT Anecdotal evidence suggests that the dividend policy of German firms is more flexible than the one of their Anglo-American counterparts. This paper analyses the decision to change the dividend for a panel of 221 German firms from 1984 to 1994. The choice of the period of study is motivated by the fact that at the start of this period there was an economic boom which was followed by a recession. Consistent with the traditional dividend literature, e.g. Lintner (1956), net earnings are key determinants of the decision to change the dividend. However, the study comes up with two findings which are contrary to Lintner (1956) and Miller and Modigliani (1961). First, the level of net earnings is not the only key determinant of the dividend decision, as the occurrence of a loss -whatever its magnitude -has an explanatory power exceeding the one of the level of the loss. Second, dividend cuts or omissions tend to be temporary and the majority of German firms quickly (within two years) revert to their initial dividend level. This stands in marked contrast with DeAngelo et al. (1992) who find that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basi...

German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down. Acknowledgements:We are indebted to Peter Alamire, Steve Bond, Julian Franks, Jens Köke, Colin Mayer, Joe McCahery, Christian Schlag, Reinhardt Schmidt, Mark Wahrenburg, and seminar participants at the Goethe University of Frankfurt for valuable comments and suggestions. We are grateful to Luis Correia da Silva for providing us with part of the data. Dividend policy of German firmsA panel data analysis of partial adjustment models ABSTRACTGerman firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.

No abstract