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Cross-sectional differences in the profits, returns and risk of firms initiating dividends

  • Neil L. Fargher
  • Robert A. Weigand
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    Purpose – The purpose of this paper is to examine the Dickens et al. model of bank holding company dividend policy. They identified five explanatory factors in a sample of bank holding companies (BHCs). Banking companies typically pay larger dividends and more often than industrial firms. Investors often look at the dividends as being important return variables. Design/methodology/approach – In this study, a sample of 99 firms with 2006 data from governmental reports and Yahoo is used in regression equations to test the relationship of the five identified variables with dividend yields. The analysis is extended to investigate non-linearities between dividend yield and insider ownership. Findings – The paper finds that the original model is robust, but not all variables keep their significance. Insider holdings have a non-linear relationship with dividend yields. Practical implications – The significant factors affecting bank dividend policy help dividend seeking investors find BHCs that return higher dividend yields. Originality/value – This paper reveals a non-linear link between insider holdings and dividend yields among BHCs.

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    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 35 (2009)
    Issue (Month): 6 (May)
    Pages: 509-530

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    Handle: RePEc:eme:mfipps:v:35:y:2009:i:6:p:509-530
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    1. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
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    6. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
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    8. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
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    13. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
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    15. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. " Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    16. Watts, Ross, 1973. "The Information Content of Dividends," The Journal of Business, University of Chicago Press, vol. 46(2), pages 191-211, April.
    17. Baker, H. Kent & Powell, Gary E. & Veit, E. Theodore, 2002. "Revisiting the dividend puzzle: Do all of the pieces now fit?," Review of Financial Economics, Elsevier, vol. 11(4), pages 241-261.
    18. 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.
    19. Gustavo Grullon & Roni Michaely & Shlomo Benartzi & Richard H. Thaler, 2005. "Dividend Changes Do Not Signal Changes in Future Profitability," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1659-1682, September.
    20. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    21. DeAngelo, Harry & DeAngelo, Linda, 2006. "The irrelevance of the MM dividend irrelevance theorem," Journal of Financial Economics, Elsevier, vol. 79(2), pages 293-315, February.
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