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Inflation and the dividend policy of US firms

  • Tobias Basse
  • Sebastian Reddemann
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    Purpose – The purpose of this paper is to analyse the dividend policy of firms from a macroeconomic perspective. In order to do so inflation and real growth are also considered. Design/methodology/approach – The paper examines the relationship between dividends, corporate earnings, real growth and inflation in the USA by applying cointegration techniques. In this framework, impulse response analysis is used to test the two most popular theories of dividend determination. Findings – The data indicate three cointegration relations among the four-time series. Impulse response analysis then shows some interesting dynamics. Dividend smoothing seems to be a relevant phenomenon. Furthermore, inflation has a positive effect on dividends. Research limitations/implications – The most important finding of this paper is the indication of a positive relationship between inflation and dividend payments. This can be interpreted in two different ways: managers may try to follow a dividend policy, which is perceived to be optimal, believing that there is a desirable level of real dividend income to be paid to their investors. On the other hand, inflation may simply increase the nominal value of corporate earnings and therefore the dividends paid. Independently from the interpretation of the results, inflation should definitely be considered analysing dividend policy. Practical implications – Managers should also examine the inflationary environment formulating an adequate dividend policy for their firm. Originality/value – The paper provides an as of yet widely ignored link between the micro- and macroeconomic sphere examining one of the most important problems of financial economics. Neglecting the effects of inflation on dividends may, among others, be one reason for the mixed empirical findings testing theories of dividend determination.

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

    Volume (Year): 37 (2011)
    Issue (Month): 1 (January)
    Pages: 34-46

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    Handle: RePEc:eme:mfipps:v:37:y:2011:i:1:p:34-46
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    1. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    2. Martin Feldstein, 1981. "Inflation, Capital Taxation, and Monetary Policy," NBER Working Papers 0680, National Bureau of Economic Research, Inc.
    3. N. Bhattacharyya, 2007. "Dividend policy: a review," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 4-13.
    4. Bent Nielsen, 2000. "Cointegration Analysis in the Presence of Structural Breaks in the Deterministic Trend," Econometric Society World Congress 2000 Contributed Papers 1494, Econometric Society.
    5. Ansgar Belke & Thorsten Polleit, 2005. "Monetary Policy and Dividend Growth in Germany: Long-Run Structural Modelling versus Bounds Testing Approach," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 250/2005, Department of Economics, University of Hohenheim, Germany.
    6. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 2000. "Special dividends and the evolution of dividend signaling," Journal of Financial Economics, Elsevier, vol. 57(3), pages 309-354, September.
    7. 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.
    8. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
    9. Doornik, Jurgen A, 1998. " Approximations to the Asymptotic Distributions of Cointegration Tests," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 573-93, December.
    10. Bernhardt, Dan & Douglas, Alan & Robertson, Fiona, 2005. "Testing dividend signaling models," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 77-98, January.
    11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    12. Varouj Aivazian & Laurence Booth & Sean Cleary, 2003. "Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 371-387.
    13. João R. Faria & Francisco Galrão Carneiro, 2001. "Does High Inflation Affect Growth in the Long and Short Run?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 89-105, May.
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