The Dividend Policy of German Firms

Abstract

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.

Economic reforms, determinants and stability of dividends in a dynamic setting

“…MV/BV, leverage and owner structure play no role in whether a firm pays dividends or not. Andres et al (2008), employing PAM on dynamic panel data, find that German firms do not seem to base their dividend decisions on long-term target dividend ratios based on public earnings. Regarding the speed of adjustment of dividends towards the long-term target dividend ratio, they find that UK and US companies slowly adjust their dividend policy, whereas German companies tend to be more willing to cut the dividend in the wake of a consistent decrease in profitability.…”