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When do German firms change their dividends?

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  • Goergen, Marc
  • Renneboog, Luc
  • Correia da Silva, Luis

Abstract

Anecdotal evidence suggests that the dividend policy of German firms is more flexible than the one of their Anglo-American counterparts.This paper analyses the decision to change the dividend for a panel of 221 German firms from 1984 to 1994.The choice of the period of study is motivated by the fact that at the start of this period there was an economic boom which was followed by a recession.Consistent with the traditional dividend literature, e.g.Lintner (1956), net earnings are key determinants of the decision to change the dividend.However, the study comes up with two findings which are contrary to Lintner (1956) and Miller and Modigliani (1961).First, the level of net earnings is not the only key determinant of the dividend decision, as the occurrence of a loss - whatever its magnitude - has an explanatory power exceeding the one of the level of the loss.Second, dividend cuts or omissions tend to be temporary and the majority of German firms quickly (within two years) revert to their initial dividend level.This stands in marked contrast with DeAngelo et al.(1992) who find that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis.Furthermore, the fact that German firms frequently omit and cut their dividend and quickly return to their initial dividend suggests that dividends in Germany have less of a signalling role than dividends in the US and the UK.Our findings also contradict Bhattacharya's (1979) argument that the costs of dividend changes are asymmetric with dividend reductions being more costly to the firm than dividend increases.Finally, we find evidence that firms with banks as their major shareholder are more willing to omit their dividend than firms controlled by other types of shareholder.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 11 (2005)
Issue (Month): 1-2 (March)
Pages: 375-399

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Handle: RePEc:eee:corfin:v:11:y:2005:i:1-2:p:375-399

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Web page: http://www.elsevier.com/locate/jcorpfin

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References

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  1. Gugler, Klaus, 2003. "Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1297-1321, July.
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  4. Marc Goergen & Luc Renneboog, 2003. "Why Are the Levels of Control (So) Different in German and U.K. Companies? Evidence from Initial Public Offerings," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 141-175, April.
  5. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
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  12. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 1996. "Reversal of fortune Dividend signaling and the disappearance of sustained earnings growth," Journal of Financial Economics, Elsevier, vol. 40(3), pages 341-371, March.
  13. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
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  15. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
  16. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
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  19. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "The Role of Banks in Reducing the Costs of Financial Distress in Japan," NBER Working Papers 3435, National Bureau of Economic Research, Inc.
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  21. Christie, William G., 1994. "Are Dividend Omissions Truly the Cruelest Cut of All?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 459-480, September.
  22. Edwards,Jeremy & Fischer,Klaus, 1996. "Banks, Finance and Investment in Germany," Cambridge Books, Cambridge University Press, number 9780521566087, October.
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  28. Amihud, Yakov & Murgia, Maurizio, 1997. " Dividends, Taxes, and Signaling: Evidence from Germany," Journal of Finance, American Finance Association, vol. 52(1), pages 397-408, March.
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