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The information content of cashflows in the context of dividend smoothing

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  • Basil Al-Najjar
  • Yacine Belghitar

Abstract

This paper aims to investigate the information content of cash flows in the context of dividend smoothing. Unlike previous studies, we propose a novel partial adjustment model based on cash flows, and compare it to Lintners (1956) model. The results show that UK firms smooth their cash flows and that cash flows are the key determinant of dividend policy. Moreover, our proposed dividend partial adjustment model has a lower adjustment coefficient than Lintners model, suggesting that our estimates are much closer to reality. The results are consistent across different measures of cash flows.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 17 (2012)
Issue (Month): 2 (September)
Pages: 57-70

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Handle: RePEc:eis:articl:212alnajjar

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  1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  3. Ilan Guttman & Ohad Kadan & Eugene Kandel, 2010. "Dividend Stickiness and Strategic Pooling," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4455-4495, December.
  4. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  5. Mark T. Leary & Roni Michaely, 2011. "Determinants of Dividend Smoothing: Empirical Evidence," Review of Financial Studies, Society for Financial Studies, vol. 24(10), pages 3197-3249.
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  8. Andreas Charitou & Nikos Vafeas, 1998. "The Association Between Operating Cash Flows and Dividend Changes: An Empirical Investigation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(1&2), pages 225-249.
  9. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
  10. Aivazian, Varouj A. & Booth, Laurence & Cleary, Sean, 2006. "Dividend Smoothing and Debt Ratings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 439-453, June.
  11. Andres, Christian & Betzer, André & Goergen, Marc & Renneboog, Luc, 2009. "Dividend policy of German firms: A panel data analysis of partial adjustment models," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 175-187, March.
  12. 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.
  13. Roni Michaely & Michael R. Roberts, 2012. "Corporate Dividend Policies: Lessons from Private Firms," Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 711-746.
  14. Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May.
  15. Varouj Aivazian & Laurence Booth & Sean Cleary, 2003. "Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 371-387.
  16. Moh'd, Mahmoud A & Perry, Larry G & Rimbey, James N, 1995. "An Investigation of the Dynamic Relationship between Agency Theory and Dividend Policy," The Financial Review, Eastern Finance Association, vol. 30(2), pages 367-85, May.
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