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Determinants of Cyclical Aggregate Dividend Behavior


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  • Samih Antoine Azar

    (Faculty of Business Administration & Economics, Haigazian University)

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    The purpose of this paper is to find the determinants of cyclical real aggregate dividends. In the literature, dividends are hypothesized to be proportional to real permanent earnings, with a smoothing factor that is between zero and +1. An additional postulate is that dividends adjust to a target dividend payout ratio. Managers will only change dividends if they can be sure that permanent earnings have increased. This allows for the payout ratio to be persistent and avoids reversing the payout decision if temporary earnings fall. The contribution of this paper is six-fold. The first is to generate cyclical changes of the variables by an appropriate filtering rule, a rule that is a common usage in macroeconomics. The second is to consider two proxies for real permanent earnings: real stock market prices, keeping real interest rates constant, and long term real interest rates, keeping market prices constant. The third is to adjust the estimation procedure for conditional heteroscedasticity. The fourth is to test whether transitory real earnings have an impact on dividends. The fifth is to find out if there are symmetrical effects of positive and negative earnings shocks. The last is to carry out stability tests over different time periods. One of the major findings is that, the three independent variables--stock market prices, interest rates, and transitory earnings, all have a significant effect on dividends, and that the smoothing factor is surprisingly the same for all three independent variables.

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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 2 (2012)
    Issue (Month): (August)
    Pages: 71-78

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    Handle: RePEc:bap:journl:120306

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    Keywords: Hodrick-Prescott de-trending method; Aggregate dividend behavior; Current and permanent aggregate earnings; Present value constraint; Real interest rates; Stationarity; Conditional heteroscedasticity;

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    1. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Benartzi, Shlomo & Michaely, Roni & Thaler, Richard H, 1997. " Do Changes in Dividends Signal the Future or the Past?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1007-34, July.
    3. Garrett, Ian & Priestley, Richard, 2000. "Dividend Behaviour and Dividend Signaling," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 35(02), pages 173-189, June.
    4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
    5. Kao, Chihwa & Wu, Chunchi, 1994. "Tests of Dividend Signaling Using the Marsh-Merton Model: A Generalized Friction Approach," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 67(1), pages 45-68, January.
    6. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
    7. Terry A. Marsh and Robert C. Merton., 1986. "Dividend Behavior for the Aggregate Stock Market," Research Program in Finance Working Papers, University of California at Berkeley 163, University of California at Berkeley.
    8. Doron Nissim, 2001. "Dividend Changes and Future Profitability," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2111-2133, December.
    9. Pan, Ming-Shiun, 2001. "Aggregate Dividend Behavior and Permanent Earnings Hypothesis," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 36(1), pages 23-38, February.
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