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Current Versus Permanent Earnings for Estimating Alternative Dividend Payment Behavioral Model: Theory, Methods and Applications

In: Encyclopedia of Finance

Author

Listed:
  • Cheng-Few Lee

    (Rutgers University)

  • Hong-Yi Chen

    (Department of Finance, National Chengchi University)

  • Alice C. Lee

    (Center for PBBEF Research)

  • Yuhsin Tai

    (Rutgers, The State University of New Jersey)

Abstract

The main purposes of this chapter are to: (1) theoretically explain why firms generally allocate permanent earnings and transitory earnings between dividends payments and retained earnings; (2) develop alternative methods for decomposing current earnings into permanent and transitory components; (3) empirically estimate alternative dividend payment behavior models by using two alternative permanent EPS estimates for both individual firms and pooled data; and (4) test Lambrecht and Myer’s (2012) theoretically results related to alternative dividend payment behavior models. We find that the average long-term payout ratio is downward biased and the average estimated intercept is generally upward biased when current instead of permanent EPS are used. We also find that the combined model performs well to deal with both measurement errors and specification errors in describing the dividend payment behavior model.

Suggested Citation

  • Cheng-Few Lee & Hong-Yi Chen & Alice C. Lee & Yuhsin Tai, 2022. "Current Versus Permanent Earnings for Estimating Alternative Dividend Payment Behavioral Model: Theory, Methods and Applications," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 70, pages 1599-1640, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_70
    DOI: 10.1007/978-3-030-91231-4_70
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