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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
56.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J, 1992.
" Dividends and Losses,"
Journal of Finance,
American Finance Association, vol. 47(5), pages 1837-63, December.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Andres, C. & Betzer, A. & Goergen, M. & Renneboog, L.D.R., 2008.
"The Dividend Policy of German Firms,"
Discussion Paper
2008-67, Tilburg University, Center for Economic Research.
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