The dividend policy of the Portuguese corporations: Evidence from Euronext Lisbon

Dividend policy behaviour of corporations is significantly different from country for country. Although dividend policy has attracted a great deal of research, it is not satisfactory explained why corporations distribute a portion of their earnings as dividends or why investors pay attention to dividends. The research and theory on the “dividend puzzle” (Black, 1976) have also been influenced by the empirical observations of the market corporate and investor attitude towards the dividend policy. Lintner (1956) observes that corporations trading in developed capital markets follow stable dividend policies and pay out a substantial part of their earnings as dividends. The focus of this study is to study how the corporations that trade in the Lisbon Stock Exchange (Euronext Lisbon), a small European stock market, set their dividend policies in a different institutional environment and research empirically whether the Euronext Lisbon corporations follow stable cash dividend policies as in developed markets where dividend smoothing is a management tendency. For testing dividend stability and institutional effects we use the dividend policy model of Lintner (1956). The data are from Euronext Lisbon and excluded financial institutions, since these corporations are governed by different regulations in regard to their dividend policies. The sample is an unbalanced panel data. We estimate the Lintner model by using panel data regressions which are significantly different from the estimation methodologies used in Linter’s and Fama and Babiak’s studies. In panel data regression, time-series and cross-sectional observations are combined and estimated. The main advantage of pooling is that it is possible increase the number of observations, which is important when each individual crosssection sample is so small that sample size effects affect the degrees of freedom adversely. The panel data methodology is also important to eliminate heterogeneity, namely the unobservable characteristics of the contracting environment. In the research we use the three common techniques for estimating models with panel data, which are: pooled ordinary least squares, the fixed effects model and random effects model. Subsequently, we use proper test statistics, namely the F-statistic and the Hausman test to choose the most appropriate model for the particular sample. The F-statistic tests the null hypothesis that the efficient estimator is the pooled ordinary least squares compared to the fixed effects model. The Hausman statistic tests the null hypothesis that random effects model is appropriated for the particular sample compared to the fixed effects model. This study provides evidence from the Euronext Lisbon, a European stock market, and analyses empirically whether the Portuguese corporations follow stable cash dividends. The empirical results show that the Euronext Lisbon corporations follow a relatively stable cash dividend policies and the main factors that determines the dividends is the earnings of the firm in that year and the lagged dividends.