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When do German firms change their dividends?

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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  1. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert Vishny, 1998. "Agency Problems and Dividend Policies Around the World," NBER Working Papers 6594, National Bureau of Economic Research, Inc.
  2. 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.
  3. DeAngelo, Harry & DeAngelo, Linda, 1990. " Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms," Journal of Finance, American Finance Association, vol. 45(5), pages 1415-31, December.
  4. Alex Kane & Young Ki Lee & Alan J. Marcus, 1983. "Earnings and Dividend Announcements is there a Corroboration Effect?," NBER Working Papers 1248, National Bureau of Economic Research, Inc.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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  7. Julian Franks & Colin Mayer, 2001. "Ownership and Control of German Corporations," OFRC Working Papers Series 2001fe11, Oxford Financial Research Centre.
  8. Barca, Fabrizio & Becht, Marco (ed.), 2001. "The Control of Corporate Europe," OUP Catalogue, Oxford University Press, number 9780199247424, March.
  9. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
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  11. Healy, Paul M. & Palepu, Krishna G., 1988. "Earnings information conveyed by dividend initiations and omissions," Journal of Financial Economics, Elsevier, vol. 21(2), pages 149-175, September.
  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.
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  18. Marco Becht & Ekkehart Boehmer, 2001. "Ownership and voting power in Germany," ULB Institutional Repository 2013/13334, ULB -- Universite Libre de Bruxelles.
  19. Kathryn L. Dewenter & Vincent A. Warther, 1998. "Dividends, Asymmetric Information, and Agency Conflicts: Evidence from a Comparison of the Dividend Policies of Japanese and U.S. Firms," Journal of Finance, American Finance Association, vol. 53(3), pages 879-904, 06.
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  27. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J, 1992. " Dividends and Losses," Journal of Finance, American Finance Association, vol. 47(5), pages 1837-63, December.
  28. Davidson, Russell & MacKinnon, James G., 1984. "Convenient specification tests for logit and probit models," Journal of Econometrics, Elsevier, vol. 25(3), pages 241-262, July.
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