Residual Dividend Policy

Smith, David M.

doi:10.1002/9781118258408.ch7

Cited by 14 publications

(11 citation statements)

References 27 publications

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“…As Baker () states, MM's unconventional and controversial conclusion about DP irrelevance stirred a heated debate that has reverberated throughout the finance community for decades. The DP theories developed are the following:The dividend irrelevance theory, where dividend payout policy does not affect overall firm value in perfect capital markets (Ang and Ciccone, ).The residual DP theory, where managers exhaust all available positive net present value investments and then pay the residual cash flow as dividend (Smith, ).The tax clientele effects theory, where investors prefer firms to retain cash instead of pay dividends because the tax rate on dividends is typically higher than on long‐term capital gains (Saadi and Dutta, ).The cash flow signalling hypothesis, where the stock price moves in the same direction as the dividend because dividend changes convey information about the firm's future growth opportunities (Mukherjee, ).The free cash flow hypothesis, where price reacts favourably to the announcement of a dividend increase because this increase reduces the agency cost of free cash flow (funds available to managers for perquisite consumption) (Mukherjee, ).The signalling theory, where unexpected dividend increases (decreases) are associated with significant share‐price increases (decreases) because dividend changes signal future prospects of the firm and thus reduce the information asymmetries existing between firm managers and the market (Filbeck, ).The firm life cycle theory, where the optimal DP of a firm is based on its life cycle. A firm will begin paying dividends when its growth rate and profitability are expected to decline in the future (Bulan and Subramanian, ).The catering theory, where managers cater to investor demand by paying dividends when investors prefer dividend‐paying firms and by not paying dividends (or reducing the dividend) when investors prefer non‐dividend‐paying companies (De Rooij and Renneboog, ).The behavioural theory explains the impact of age, retirement status and income on the relationship between consumer expenditures and the preference for dividends, and a psychological approach to dividend theory explains the relationship between tolerance for risk and the preference for dividends (Shefrin, ).…”

Section: Related Literaturementioning

confidence: 99%

“…The DP theories developed are the following:• The dividend irrelevance theory, where dividend payout policy does not affect overall firm value in perfect capital markets (Ang and Ciccone, 2009). • The residual DP theory, where managers exhaust all available positive net present value investments and then pay the residual cash flow as dividend (Smith, 2009). • The tax clientele effects theory, where investors prefer firms to retain cash instead of pay dividends because the tax rate on dividends is typically higher than on long-term capital gains (Saadi and Dutta, 2009).…”

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confidence: 99%

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Corporate Dividend Policy Determinants: Intelligent Versus a Traditional Approach

Longinidis

Symeonidis

2013

Intell. Sys. Acc. Fin. Mgmt.

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SUMMARY Dividend is the return that an investor receives when purchasing a company's shares. The decision to pay these dividends to shareholders concerns several other groups of people, such as financial managers, consulting firms, individual and institutional investors, government and monitoring authorities, and creditors, just to name a few. The prediction and modelling of this decision has received a significant amount of attention in the corporate finance literature. However, the methods used to study the aforementioned question are limited to the logistic regression method without any implementation of the advanced and expert methods of data mining. These methods have proven their superiority in other business‐related fields, such as marketing, production, accounting and auditing. In finance, bankruptcy prediction has the vast majority among data‐mining implementations, but to the best of the authors’ knowledge such an implementation does not exist in dividend payment prediction. This paper satisfies this gap in the literature and provides answers that help to understand the so‐called ‘dividend puzzle’. Specifically, this paper provides evidence supporting the hypothesis that data‐mining methods perform better in accuracy measures against the traditional methods used. The prediction of dividend policy determinants provides valuable benefits to all related parties, as they can manage, invest, consult and monitor the dividend policy in a more effective way. Copyright © 2013 John Wiley & Sons, Ltd.

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Section: Related Literaturementioning

confidence: 99%

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confidence: 99%

Corporate Dividend Policy Determinants: Intelligent Versus a Traditional Approach

Longinidis

Symeonidis

2013

Intell. Sys. Acc. Fin. Mgmt.

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“…Lastly, the residual thought can be easily mixed up with one of the various cash adjustment smoothing techniques. In most instances, this is the way it is applied in real-world dividend practice, (Smith, 2009). The proponents of the residual dividends theory argue that a firm may make use of the dividend as a signaling mechanism for investors and other stakeholders.…”

Section: 4mentioning

confidence: 99%

“…Furthermore, dividend forms a sizable chunk in a firm's capital structure (Frank & Goyal, 2003;Aggarwal & Kyaw, 2010). When this happens, the proponents of the residual dividend theory contends that if there is no profitable business opportunities, then firms can only disburse profit, (Baker & Smith, 2006;Smith, 2009). As much as there are proponents of this theory, there are also opponents of the same.…”

Section: 4mentioning

confidence: 99%

Fundamental Anomalies and Firms Financial Distress; Evidence from Nairobi Securities Exchange, Kenya

Roche¹,

Olweny²,

Nasieku³

2020

Journal of Applied Finance &Amp; Banking

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Stock market broadly referred to as security exchange has gained so much interests from various stakeholders around the world as they endow exceedingly to the growth of the world economy. Nairobi Securities Exchange, being an emerging stock market, this study therefore considered dividend yield anomaly, measured by dividend per share and price to earnings anomaly operationalized through earnings per share as the types of the fundamental anomalies. When there is fundamental anomaly, firms tend to exhibit unhealthy financial position which is financial distress, measured by Z-Score. The main objective of this study is to examine the relationship between fundamental anomalies and firms’ financial distress; evidence from Nairobi Securities Exchange, Kenya. This study adopts descriptive research design and embraced secondary data from 2007 to 2017 from a target population of 67 listed firms. It was found that there existed a relationship between fundamental anomalies and firms’ financial distress. The study recommends that the management should put in place the right dividend policies, declaration or nondeclaration of dividends in the treatment of dividends. For policy makers and regulators, the recommendations will assist in restoring law and order and this will enable all the stakeholders to have confidence in Nairobi Securities Exchange. Keywords: Securities Exchange, Financial Distress, Fundamental Anomalies.

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“…Dividends are paid from the firm's retained earnings, which can also be used to invest in core businesses (external opportunities). Dividends are paid after reinvestment in external opportunities, which reflects the firm's residual dividend policy (Smith, 2009).…”

Section: Introductionmentioning

confidence: 99%

Leverage Adjustment in Manufacturing Firms: Evidence from Pakistan

Samim¹,

Awan²,

Ahmad³

2016

LJB

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This study explores firms’ leverage behavior and speed of adjustment in the context of selected performance indicators in Pakistan’s manufacturing industry. Leverage behavior is predicted using ordinary least squares, based on four performance indicators: profitability, tangibility, size and growth. The speed of adjustment of leverage is estimated using a general linear model and partial adjustment model. We find that profitability, tangibility and growth play a significant role in leverage behavior and the speed of adjustment, although both differ across sectors. Moreover, exponential leverage adjustment appears to be better than linear leverage adjustment.

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Residual Dividend Policy

Cited by 14 publications

References 27 publications

Corporate Dividend Policy Determinants: Intelligent Versus a Traditional Approach

Corporate Dividend Policy Determinants: Intelligent Versus a Traditional Approach

Fundamental Anomalies and Firms Financial Distress; Evidence from Nairobi Securities Exchange, Kenya

Leverage Adjustment in Manufacturing Firms: Evidence from Pakistan

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