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Reading Academic Dividends Papers....


I'd suggest to an investor without good knowledge of statistics NOT to read academic papers on finance and for dividend investor I'd suggest to read the book "Dividends and dividend policy" /H. Kent Baker (Editor) instead.
I remember Warren Buffett quote "Beware of geeks bearing formulas". Nevertheless, I know statistics quite well (as physicist and engineer, not as mathematician or economist) and read some academic papers on dividends and there are notes:

Why NOT to sell at dividends cut?:

Market Response to Subsequent Dividend Actions of Dividend-Initiating and -Omitting Firms
James N. Rimbey, Dennis T. Officer
Quarterly Journal of Business and Economics, Vol. 31, No. 1 (Winter, 1992), pp. 3-20
This study examines the tendency of many firm shares to move opposite the direction predicted by signaling theory upon the announcement of a major dividend policy change. This research attempts to reconcile such market behavior in the context of an A-firm/B-firm dichotomy created by conflicting signals sent by the firm. Investor uncertainty instead may stem from a lack of information reaching the marketplace.

Dividend stocks: buy & hold with control:

Long-Run Stock Returns: Participating in the Real Economy

Roger G. Ibbotson, Peng Chen

Financial Analysts Journal, Vol. 59, No. 1 (Jan. - Feb., 2003), pp. 88-98

In the study reported here, we estimated the forward-looking long-term equity risk premium by extrapolating the way it has participated in the real economy. We decomposed the 1926-2000 historical equity returns into supply factors--inflation, earnings, dividends, the P/E, the dividend payout ratio, book value, return on equity, and GDP per capita. Key findings are the following. First, the growth in corporate productivity measured by earnings is in line with the growth of overall economic productivity. Second, P/E increases account for only a small portion of the total return of equity. The bulk of the return is attributable to dividend payments and nominal earnings growth (including inflation and real earnings growth). Third, the increase in the equity market relative to economic productivity can be more than fully attributed to the increase in the P/E. Fourth, a secular decline has occurred in the dividend yield and payout ratio, rendering dividend growth alone a poor measure of corporate profitability and future growth. Our forecast of the equity risk premium is only slightly lower than the pure historical return estimate. We estimate the expected long-term equity risk premium (relative to the long-term government bond yield) to be about 6 percentage points arithmetically and 4 percentage points geometrically.

Will Stocks Continue to Outperform Bonds in the Future?

Edward Renshaw

Financial Analysts Journal, Vol. 53, No. 2 (Mar. - Apr., 1997), pp. 67-73

Valuation of the earnings and dividends associated with the S&P 500 Composite Stock Price Index has changed over time. These changes, in conjunction with record amounts of retirement money that are now being funneled into mutual funds and wider fluctuations in the price of corporate bonds, suggest that the earnings and dividend price ratios for representative stock market averages may someday be reduced to the point where the before-tax returns on equities will not be greater than the returns on corporate bonds.

Does the "Dow-10 Investment Strategy" Beat the Dow Statistically and Economically?

Grant McQueen, Kay Shields, Steven R. Thorley

Financial Analysts Journal, Vol. 53, No. 4 (Jul. - Aug., 1997), pp. 66-72

A comparison of returns from 1946 to 1995 on a portfolio of the 10 Dow Jones Industrial Average stocks with the highest dividend yields (the Dow-10) with those from a portfolio of all 30 stocks in the DJIA (the Dow-30) shows that the Dow-10 portfolio beats the Dow-30 statistically; that is, the Dow-10 has significantly higher average annual returns. After adjusting for the Dow-10 portfolio's higher risk, extra transaction costs, and unfavorable tax treatment, however, the Dow-10 does not beat the Dow-30 economically. In some subperiods, Dow-10 performance is economically superior, but the question is how to interpret this information in light of the potential for data mining and investor learning.

Dividend-Yield Strategies in the Canadian Stock Market

Sue Visscher, Greg Filbeck

Financial Analysts Journal, Vol. 59, No. 1 (Jan. - Feb., 2003), pp. 99-106

The "Dogs of the Dow" strategy has become an increasingly popular investment strategy for unit investment trusts, resulting in superior performance for U.S.-based investors. To examine its effectiveness for Canadian investors, we applied this high-dividend-yield strategy to the Toronto 35 Index for the first 10 years of the index's existence. The 10 topperforming portfolios' higher compound returns were sufficient to compensate for taxes and transaction costs. Perhaps more important, both the Sharpe ratio, which measures excess return to total risk, and the Treynor index, which measures excess return to market risk, indicate that the strategy produced higher risk-adjusted returns than the Toronto 35. The Dogs strategy also performed well against the broader, but similar, Toronto Stock Exchange 300 Index.


Please remember that academic papers might be wrong, esp. if written by PhD students. Below is humorous translator of some phrases from academic papers.

Nevertheless I think academic papers are useful.



Dividend Payout and Future Earnings Growth
Financial Analysts Journal, Vol. 62, No. 3 (May/June 2006): 58-69
Ping Zhou and William Ruland
Because dividends reduce the funds available for investment, many market observers and investors associate high dividend payout with weak future earnings growth. Tests using aggregate market data, however, provided evidence that contradicts that view. Because aggregate results may not apply at the company level, we conducted a company-by-company analysis of the relationship between payout and future earnings growth. Our tests also show that high-dividend-payout companies tend to experience strong, not weak, future earnings growth. These results are robust to alternative measures of payout and earnings, sample composition, mean reversion in earnings, the effects of particular industries, time periods, and share repurchases.

International Evidence on the Payout Ratio, Earnings, Dividends, and Returns
Financial Analysts Journal
Owain ap Gwilym, James Seaton, Karina Suddason, and Stephen Thomas
January/February 2006, Vol. 62, No. 1: 36-53
Recent evidence for the U.S. market has shown that, contrary to popular wisdom, the greater the proportion of earnings paid out as dividends, the greater the subsequent real earnings growth. This study extends previous work by examining whether a similar relationship exists in 11 international markets and by considering the role the payout ratio plays in explaining future real dividend growth and returns. Higher payout ratios do indeed lead to higher real earnings growth-but not to higher real dividend growth. This information has limited use, however, for predicting future returns.

The Meaning of a Slender Risk Premium
Robert D. Arnott
Financial Analysts Journal March/April 2004, Vol. 60, No. 2: 6-8
The superiority of stocks over bonds for the long-term investor is typically supported by two ideas-a hefty equity risk premium and the growth of dividends vs. nongrowing bond coupons. This piece challenges both ideas. The equity risk premium is unknown. We can estimate it (and all too often, we do so badly by merely extrapolating the past). Should a risk premium exist? Of course. Is its existence written into contract law for any assets we buy? Of course not. This piece develops the outcomes of stock versus bond returns if we accept a skinny risk premium. These "worst reasonable" (5th-percentile-outcome chance of a shortfall) calculations indicate that if the risk premium is 2 percent, wealth from stocks will be 50 percent behind wealth from bonds even after 35 years of patient investing. If dividend growth matches the 4 percent average rate for the 20th century, (1) dividend income (starting from the current 1.5 percent) will need 32 years to overtake bond coupon income and (2) cumulative income from stocks will require a startling 54 years to keep pace with that from bonds.

What Is the Puzzle in "the Dividend Puzzle"?
George M. Frankfurter
Journal of Investing, Vol. 8, No. 2 (Summer 1999): 76-85
A persistent riddle in modern finance is the "dividend puzzle." The puzzle is that, although dividends are taxed as ordinary income at the corporate and personal level, investors bid up the prices of stocks that pay dividends. Behaving in this way is not economically rational, and researchers have wrestled with this puzzle for 40 years. The author reviews this research and categorizes the various dividend models into four groups. The first two groups follow the formalism of modern finance theory and its assumption of economic rationality. The last two groups are skeptical of economic rationality but endeavor to use formal modeling techniques. The author then critiques each of these groups of models and offers his own resolution of the dividend puzzle.
The first group of models is labeled "full information models." These models argue that two opportunity reinvestment rates exist-one for the company and another for the investor. If the investor's opportunity rate is greater, the investor will like dividends because he or she can earn the higher rate of return. The author finds this argument to be unconvincing: If the investor's opportunity rate is higher, why not sell the stock, invest the proceeds, and avoid double taxation altogether? Also, if the full information model is correct, then researchers should observe dividend payout rates of either 100 percent or 0 percent, respectively, depending on whether the investor's opportunity rate is greater or less than the company's. Instead, researchers observe dividend payments that grow steadily over time.
The second group of dividend models is called "asymmetric information models." These models assume that corporate insiders know more about the future of their company than do outside investors. In the face of this asymmetric information, companies use dividends to signal investors. Dividends are a positive signal, and investors rationally process this signal by bidding up the company's stock. The author points out that much more efficient ways exist for corporations to communicate to investors. In addition, companies do not appear to pay dividends according to the asymmetric information model: Dividends grow steadily over time, irrespective of changes in the company's fortunes. In fact, companies rarely decrease dividends even if their prospects are grim.
The next two groups of models depart from strict adherence to economic rationality. Instead, emphasis is placed on sociological and psychological factors as determinants of corporate dividend policy. The author labels the third group "behavioral models." These models argue that corporate dividend policy is not economically rational but is determined by societal norms and practices that can be better explained by sociological or psychological behavioral models. For example, executives in similar industries seem to be influenced by each other when setting dividend payout ratios. In addition, because shareholders like dividends, companies continue to pay dividends to engender feelings of stability and to avoid investor disappointment. Researchers are currently building formal behavioral models.
The fourth group of dividend models relies on the use of "management surveys." These models directly ask corporate executives about their perceptions of their dividend policies. These surveys find that current corporate income determines dividend policy and that dividends are paid because shareholders expect dividends. The author sees explanatory merit in these last two groups of models.
The author argues that the dividend puzzle is not really a puzzle after all, provided one is willing to abandon the economic rationality of modern finance theory. This statement does not imply that investors are irrational, only that investors rationally make decisions given the economic, social, and psychological context of the decision. The author argues that investors love dividends because investors have been conditioned to love dividends for 400 years. Investors constantly hear market professionals praise the attractiveness of high-dividend stocks. In addition, corporate executives loudly boast whenever they boost their dividends. With professionals constantly reiterating the benefits of "nonrational" dividends, instead of educating investors to the contrary, is it any surprise that investors continue to like dividends?
The author asserts that there will never be an economically rational solution to the dividend puzzle. For the author, the real puzzle is that researchers keep trying to find such a solution.



Dividends and Cash Flow: Controversy

Simons, Kathleen
Journal of Business Finance & Accounting VL - 21; Issue 4, pages: 577 - 587; Year: 1994
It is often assumed that cash flow affects dividend payout. This study provides evidence on the incremental information content of cash flow numbers over Profits and Previous Year's Dividends (Lintner's model) in explaining changes in cash dividends. It further examines whether different measures of cash flow differ in information content for dividend-increasing and dividend-decreasing firms. Lintner's model of dividend changes is robust across firms with either dividend increases or decreases. The null hypotheses, that no definition of cash flow adds to the model, could not be rejected for any of the definitions.

The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles
David J. Denis, Diane K. Denis, Atulya Sarin
The Journal of Financial and Quantitative Analysis, Vol. 29, No. 4 (Dec., 1994), pp. 567-587
We examine the cash flow signaling, overinvestment, and dividend clientele explanations for the information content of dividend change announcements. After simultaneously controlling for the standardized dividend change, dividend yield, and Tobin's Q, we find that announcement period excess returns are positively related to the magnitude of the standardized dividend change and to the dividend yield, but unrelated to Tobin's Q. We provide further evidence on the cash flow signaling and overinvestment hypotheses by examining revisions in analysts' earnings forecasts and changes in capital expenditures following dividend change announcements. We find that analysts significantly revise their earnings forecasts following dividend changes and that $Q < 1$ firms actually increase their capital expenditures following dividend increases and decrease them following dividend decreases. Overall, our findings support the cash flow signaling and dividend clientele hypotheses for stock price reactions to dividend change announcements, but provide little support for the overinvestment hypothesis.

Larry H. P. Lang and Robert H. Litzenberger
Dividend announcements: Cash flow signalling vs. free cash flow hypothesis?
Journal of Financial Economics, Volume 24, Issue 1, September 1989, Pages 181-191
We test the cash flow signalling and free cash flow/overinvestment explanations of the impact of dividend announcements on stock prices. We use Tobin's Q ratios less than unity to designate overinvestors. The average return associated with announcements of large dividend changes is significantly larger for firms with Q's less than unity than for other firms. This evidence, the results of further tests involving a finer partition of the data, and an analysis of changes in analysts' earning forecasts surrounding dividend announcements support the overinvestment hypothesis over the cash flow signalling hypothesis.

SDS: It seems that no agreement exist in academia on (FREE) cash flow role in dividends.


Well it is not Exactly a dividend paper, anyway 2 graphs below from

Stock Market Returns in the Long Run: Participating in the Real Economy
By Roger G. Ibbotson, Ph.D. and Peng Chen, Ph.D., CFA
Estimates forward-looking long-term equity risk by extrapolating its participation in the real economy. Decomposes historical equity returns from 1926-2000 into factors including inflation, earnings, dividends, P/E, dividend payout ratio, book value, ROE, and GDP per capita.

I read this paper in the book

The Equity Premium: Essays and Explorations / Goetzmann, William N. and Roger G. Ibbotson

26 July 2014

We had a lot of discussions on dividends this spring/summer on SA. MPT proponents argue that stock price should drop on dividend ammount on ex-dividend day, so dividends do not add anything for investors. More detail studies (see below) from show that the drop is significanly smaller than dividends, so the argument above is invalid IMO.

Ex-Dividend Day Stock Price Behavior - The NASDAQ Evidence

Shishir K. Paudel / Binghamton University ; Hartwick College
Sabatino Silveri / Binghamton University


We use dividend-paying Nasdaq-listed firms as a setting to test various explanations of the ex-day price anomaly. Similar to NYSE-listed firms, on average the prices of Nasdaq-listed firms drop by less than the dividend amount on the ex-day. However, the average price-drop is half that observed for NYSE-listed firms and translates to an imputed dividend tax rate that is double the average maximum tax rate over the sample period. In addition, we find the ex-day price-drop increases in dividend yield, opposite the prediction from a tax clientele explanation. Moreover, for non-taxable distributions we find prices behave in a similar manner to taxable distributions on the ex-day, again suggesting taxes are not the primary reason for the price behavior. In sum, we find little support for tax-based explanations. We also find little support for short-term trading and market microstructure explanations. Importantly, our results are robust to transaction costs as proxied by stock price, liquidity, volatility, firm size and bid-ask spread. We supplement our analysis by investigating a subset of firms that voluntarily switch from the Nasdaq exchange to the NYSE. The average price-drop for the switching firms is similar to the Nasdaq average prior to the switch and resembles the NYSE average immediately after the switch. This change in price behavior potentially reflects a changing investor base and suggests the marginal investor of Nasdaq dividend-paying firms places relatively less importance on dividends. Overall, our results call into question the various explanations of the ex-day anomaly. Any potential explanation also needs to account for the Nasdaq evidence.


The global preference for dividends in declining markets
Michael A. Goldstein, Abhinav Goyal, Brian Lucey, Cal Muckley
We find that investors across the globe differentially prefer dividend-paying stocks over non-dividend-paying stocks more in declining markets than in advancing markets, whether in developed or emerging markets or before or after the 2008 global crisis, even accounting for growth opportunities, size and risk effects. Dividend paying stocks outperform non-dividend paying stocks, by between 0.63% (China) to 3.79% (Canada) more per month in declining markets than in advancing markets. In declining markets, dividend paying firms outperform by more than any underperformance in advancing markets. Our findings show the relative outperformance of dividend paying firms, both prior to and after the 2008 sub-prime crisis, separately assuming a segmented and a fully integrated global equity market, and excluding the month of dividend declaration. The result is also robust across subsets of emerging and developed markets, across legal environments and in respect to high and low levels of dividend payer participation. In summary, we find that it is a global result that dividends do matter to shareholders, but especially so in declining markets. (2014)

Dividend Policy and Earnings Management Across Countries
Wen He, Lilian Ng, Nataliya Zaiats and Bohui Zhang
This paper examines whether dividend policy is associated with earnings management and whether the relationship varies across countries with wide-ranging degrees of institutional strength and transparency. Based on a sample of 23,429 corporations from 29 countries, we show that dividend payers manage earnings less than dividend non-payers, and that this evidence is stronger in countries with weak investor protection and high opacity. Further, we find that dividend payers manage earnings less when they issue equity following dividend payments, and that this result is more pronounced in countries with weak institutions and low transparency. Overall, our evidence suggests that firms may employ dividend policies associated with less earnings manipulation to mitigate agency concerns and to establish credible reputation, thereby facilitating access to external funds.(2015)

When Cutting Dividends is Not Bad News: The Case of Optional Stock Dividends
Thomas David, Edith Ginglinger
We provide evidence on optional stock dividends, a mechanism that allows shareholders to choose between stock dividends and cash dividends. We find that, in contrast to dividend cuts, shareholders do not view this option as bad news. They overwhelmingly approve it at general meetings, with the majority favoring stock dividends over cash dividends. We find that large firms with limited cash holdings and a large institutional ownership are more likely to offer optional stock dividends to their shareholders. These firms are the most committed to paying dividends, and this option provides them financial flexibility by allowing temporary cuts in cash outflows without altering their nominal dividend policy. (2016)

The Effect of Managerial Ability on Dividend Policy: How Do Talented Managers View Dividend Payouts?
Pornsit Jiraporn , Veeranuch Leelalai and Shenghui Tong
We contribute to the literature on dividend policy by relaxing Miller and Modigliani's (1961) perfect capital market assumptions and incorporating a factor that has not been investigated before, i.e. variation in managerial ability. Based on more than 24,000 observations across over 20 years (1989-2011), our results show that firms with more talented executives are more likely to pay dividends and, among firms that pay dividends, pay significantly larger dividends. A rise in managerial ability by one standard deviation raises the propensity to pay dividends by 27%, and, for firms that pay dividends, increases dividend payouts by 29%. Our results are consistent with the notion that talented managers, confident in their ability to keep the firm profitable, are more willing to pay larger dividends because they are less concerned about having to reduce dividends in the future. Further analysis shows that our results are not likely vulnerable to endogeneity. (2015)

CEO Risk Preferences and Dividend Policy Decisions
Deren Caliskan, John A. Doukas
This study examines whether risk aversion-inducing CEO compensation motivates managers to pay more dividends regardless of investor preferences. Using inside debt (i.e., pensions and deferred compensation) and the sensitivity of CEO equity compensation to stock price changes (i.e., high CEO delta), as proxies of CEO risk aversion, we document that inside debt induces CEOs to pay dividends while convex CEO compensation decreases dividend payout. (2015)

Dividend Premium: Are Dividend-Paying Stocks Worth More?
Sigitas Karpavicius, Fan Yu
This paper examines whether dividend policy impacts firm value and find that paying dividends does improve firm value. Panel data regressions suggest that the dividend premium for firms' equity is 27.9% and the dividend premium for firms' assets is 11.0%. The tests using propensity score matching methodology report a lower - but still positive and statistically significant - dividend premium: 5.3% for equity and 3.7% for assets. Thus, stock prices of dividend payers are greater by 5.3% or 27.9% on average (depending on methodology) compared to those of nonpayers. We find that uncertainty index and tax code changes explain more than half of the variation in dividend premium. (2015)

Political Risk and Dividend Policy: Evidence from International Political Crises
Tao Huang, Fei Wu, Yu Jin, Bohui Zhang
We examine the impact of political risk on firms' payout policy. Using a large international sample across 35 countries over the period from 1990 to 2008, we find that global political crises raise the market perceived uncertainty and cost of external financing. Using crisis events as a proxy for political risk, we document that past dividend payers are more likely to terminate dividends and that non-payers are less likely to initiate dividends during periods of high political risk. These findings suggest a precautionary incentive of managers in response to political shocks. Further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations, but can be attenuated by country-specific institutional settings, such as more stable political systems and stronger investor legal protection.(2015)

Dividends and Foreign Performance Signaling
Robert Joliet, Aline Muller
This study uses Hines' (1996) dividend process model to test the effect of domestic versus foreign profitability shocks on firms' dividend payout policy. Investigating an international sample of 283 companies from Continental Europe, Australia, New Zealand, the U.S.A. and Canada, we find that increases in some foreign market earnings stimulate higher cash distributions than similar increases in domestic earnings. The disaggregation of foreign performance across country-specific markets reveals that managers are predominantly using dividends to signal foreign profit movements that have been generated in emerging markets and Asian Pacific developed markets - while they do not feel compelled to send signals related to positive earnings news originating from other mature developed markets (i.e. North America and Western Europe). The findings also confirm the popular view that due to their higher variance and lower persistence, positive foreign profitability shocks coming from emerging markets are more difficult to integrate into stable dividend policies.(2015)

Credit Risk and Dividend Irrelevance
Dan Galai and Zvi Wiener
Hebrew University of Jerusalem - Jerusalem School of Business Administration and Hebrew University of Jerusalem - Jerusalem School of Business Administration
We show how, in a Merton-type model with bankruptcy, the dividend policy impacts the values of equity and debt as well as credit risk. The recent financial crisis has emphasized the fact that excessive dividends can lead to financial distress. There is a strong need to set qualitative and quantitative restrictions on dividends taking into account the potential conflict between equityholders and debtholders. The model that we develop allows for a quantitative setting of restrictions on dividends and gives a useful tool to support dividend payments that may be opposed by debtholders or preclude a distribution when such could otherwise jeopardize the firm. We show the implications of our approach compared to the implications of the Signaling Approach, and the Smoothing Approach. It is shown that the Miller-Modigliani irrelevance of dividends theorem must rely on more assumptions than in the original paper. In this paper, we highlight the role of dividends (and stock repurchases) to possibly mitigate the potential conflict of interests between shareholders and debtholders. The emphasis is on the credibility of the dividend policy. (2015)

The Influence of a Credit Rating Change on Dividend and Investment Policy Interactions
Hinh Khieu and Mark Pyles
We examine the firm's alterations in dividend and investment activities following credit rating changes. We find that downgraded firms reduce both dividends and investments more than no-rating-change firms. However, a silver lining of this doubly negative impact for shareholders is an increase in investment efficiency in firms that are most likely to overinvest. For upgraded firms, investments increase, but dividend outlays do not, compared to firms without rating changes. Our findings of asymmetric dividend stickiness and symmetric investment changes upon a credit shock suggest that dividends and investments should not always be considered competing uses of funds. (2015)

Can Dividend Schedules Predict Abnormal Returns? International Evidence
Andrew B. Ainsworth and Maximilian Nicholson
This study presents international evidence on the dividend month premium. In the US, Hartzmark and Solomon (2013) find abnormally high returns during the months when stocks are predicted to pay a dividend. We test for this predicted dividend month premium in eleven developed markets, including the US. We find this anomalous result also exists in France, Germany, and Singapore with mixed results in other countries. Cross-country analysis reveals that tax differences do impact the performance of the anomaly, though the dividend month forecasting rule also plays a role in explaining abnormal returns. (2015)
SDS: Is it a dividend capture strategy conformation?

Four Centuries of Return Predictability
Benjamin Golez, Peter Koudijs
We analyze four centuries of stock prices and dividends in the Dutch, English, and U.S. market. With the exception of the post-1945 period, the dividend-to-price ratio is stationary and predicts returns throughout all four centuries. "Excess volatility" is thus a pervasive feature of financial markets. The dividend-to-price ratio also predicts dividend growth rates in all but the most recent period. Cash-flows were therefore much more important for price movements before 1945, and the dominance of discount rate news is a relatively recent phenomenon. This is consistent with the increased duration of the stock market in the recent period. (2014)

Ownership Structure and Dividend Smoothing: Cross-Country Evidence
Nahid Rahman
We investigate the dividend smoothing behavior of firms using a large sample of firms covering 28 countries. Our results show that the levels of dividend smoothing in the firms vary substantially across countries. This finding confirms and extends the findings of previous research that the dividend policy of the U.S. firms differs materially from the dividend policies of the firms in other countries. We propose that an extension of the agency view of dividends may explain the diversity of dividend smoothing behavior of our sample firms. We argue that the agency view of dividends implies that both firm- and country-level ownership structures are potentially important determinants of the dividend smoothing decisions of the firms. The results presented in this paper support this view. Both firm- and country-level ownership concentrations are negatively associated with dividend smoothing. Our results show that the effects of country-level ownership are much stronger than the effects of firm level ownership. The relation between ownership structure and dividend smoothing is robust to a variety of alternative explanations. (2002/2014)