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Dividend policy of German firms: A panel data analysis of partial adjustment models

  • Andres, Christian
  • Betzer, André
  • Goergen, Marc
  • Renneboog, Luc

German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 2 (March)
Pages: 175-187

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Handle: RePEc:eee:empfin:v:16:y:2009:i:2:p:175-187
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  2. Denis, David J. & Osobov, Igor, 2008. "Why do firms pay dividends? International evidence on the determinants of dividend policy," Journal of Financial Economics, Elsevier, vol. 89(1), pages 62-82, July.
  3. Amihud, Yakov & Murgia, Maurizio, 1997. " Dividends, Taxes, and Signaling: Evidence from Germany," Journal of Finance, American Finance Association, vol. 52(1), pages 397-408, March.
  4. Goergen, Marc & Renneboog, Luc & Correia da Silva, Luis, 2005. "When do German firms change their dividends?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 375-399, March.
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  11. Mayer, Colin & Alexander, Ian, 1990. "Banks and securities markets: Corporate financing in Germany and the United Kingdom," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 450-475, December.
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  16. Julian Franks & Colin Mayer, 2001. "Ownership and Control of German Corporations," OFRC Working Papers Series 2001fe11, Oxford Financial Research Centre.
  17. Benzinho, José, 2004. "The dividend policy of the Portuguese corporations: Evidence from Euronext Lisbon," MPRA Paper 1137, University Library of Munich, Germany.
  18. Short, Helen & Zhang, Hao & Keasey, Kevin, 2002. "The link between dividend policy and institutional ownership," Journal of Corporate Finance, Elsevier, vol. 8(2), pages 105-122, March.
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  23. Adaoglu, Cahit, 2000. "Instability in the dividend policy of the Istanbul Stock Exchange (ISE) corporations: evidence from an emerging market," Emerging Markets Review, Elsevier, vol. 1(3), pages 252-270, November.
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