Prior Payment Status and the Likelihood to Pay Dividends: International Evidence

Abstract

By using the signaling model and the life-cycle theory, I examine the importance of prior payment status in determining the likelihood to pay dividends. I categorize firms into those that paid dividends previously and those that did not. My results show that strong dividend stickiness exists and the determinants to pay differ significantly for the two groups of firms. High growth and low insider holdings make prior payers more likely to pay but prior nonpayers less likely to pay. Furthermore, prior payers are more sensitive to profitability and earned/contributed equity mix, while prior nonpayers are more sensitive to risk and dividend premiums. Finally, taking the prior payment status into account eliminates the problem of overestimating the portion of payers put forth by previous studies. Copyright (c) 2010, The Eastern Finance Association.

Can Disclosure Quality Explain Dividend Payouts?

“…Inconsistent with the prediction, the results suggest that leverage is not a substitute governance mechanism for reducing the agency costs of free cash flow. Instead, the results indicate that firms are likely to raise debt in order to maintain its dividend level, reflecting the "stickiness" in dividend payouts that have been discussed in previous literature (Guttman et al, 2010;Twu, 2010). Interestingly, our results suggest that growth firms are associated with higher dividend payouts while mature firms with high retained earnings are associated lower payouts.…”

Independent director tenure and dividends

“…Using firm-level data from 34 countries, Twu (2010) finds that dividends are sticky, further confirming that dividends are strong pre-commitments to shareholders. However, share repurchases provide managers with more discretion in terms of the amount and timing of payout, hence leading to more financial flexibility (Guay & Harford, 2000;Jagannathan et al, 2000;Oded, 2020).…”

Flexible firm-level dividends in Latin America

“…In comparison with firms in the United States (Skinner, 2008) and in international markets (Twu, 2010), we find, on average, a markedly higher proportion of firms either abandoning (8 percent) or decreasing (19 percent) their payout amount by more than 30 percent from last fiscal year in Latin America. We also observe that initiators (almost 9 percent) and marked dividend increasers (27 percent) are also prevalent in Latin America.…”

“…The corresponding proportion of firms reducing dividend is at about the 1 percent level (also see Chemmanur, 2010). Moreover, while the proportion of prior payers who pay is reported internationally as above 95 percent in Twu (2010), it is on average about 63 percent in Latin America. Hence, this constitutes intriguing evidence of a distinctively high flexibility in payout statuses and amounts in Latin America.…”