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Behavioural finance and dividend changes as predictors of future profitability: A literature review

Author

Listed:
  • Fakhrul Hasan

    (Newcastle Business School, Northumbria University, Newcastle, NE1 8ST, UK)

  • Mochammad Fahlevi

    (Management Department, BINUS Online, Bina Nusantara University, Jakarta 11480, Indonesia)

Abstract

This paper reviews the literature on dividend policy from the perspective of behavioral finance, addressing one of the long-standing puzzles in corporate finance: why firms pay dividends and whether dividend changes predict future profitability. It synthesizes theoretical and empirical evidence, emphasizing behavioral explanations such as self-control, mental accounting, and prospect theory. The review also highlights the debate over the information content of dividends and their relation to earnings, contrasting findings from signaling theory, traditional finance, and behavioral models. The paper proposes a research agenda that integrates behavioral biases and psychological factors into dividend policy research, offering new insights for academics and practitioners interested in corporate payout policy and investor behavior.

Suggested Citation

  • Fakhrul Hasan & Mochammad Fahlevi, 2024. "Behavioural finance and dividend changes as predictors of future profitability: A literature review," Journal of Economics and Business Letters, Privietlab Research Center, vol. 4(2), pages 27-39, April.
    • Handle: RePEc:prv:jeblpv:286
    DOI: 10.55942/jebl.v4i2.286
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    References listed on IDEAS

    as
    1. 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.
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    4. Stephen P. Ferris & Gregory Noronha & Emre Unlu, 2010. "The More, the Merrier: An International Analysis of the Frequency of Dividend Payment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 148-170.
    5. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    6. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    7. Michael S. Rozeff, 1982. "Growth, Beta And Agency Costs As Determinants Of Dividend Payout Ratios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 5(3), pages 249-259, September.
    8. Fakhrul Hasan, 2024. "The impact of climate change on dividend policy in the UK stock market," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 16(1), pages 119-137.
    9. 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.
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    14. Doron Nissim & Amir Ziv, 2001. "Dividend Changes and Future Profitability," Journal of Finance, American Finance Association, vol. 56(6), pages 2111-2133, December.
    15. Ding, David K. & Charoenwong, Charlie & Seetoh, Raymond, 2004. "Prospect theory, analyst forecasts, and stock returns," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 425-442.
    16. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1994. "The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(4), pages 567-587, December.
    17. Benartzi, Shlomo & Michaely, Roni & Thaler, Richard H, 1997. "Do Changes in Dividends Signal the Future or the Past?," Journal of Finance, American Finance Association, vol. 52(3), pages 1007-1034, July.
    18. Stephen P. Ferris & Gregory Noronha & Emre Unlu, 2010. "The More, the Merrier: An International Analysis of the Frequency of Dividend Payment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1‐2), pages 148-170, January.
    19. 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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    21. Fakhrul Hasan & Umar Nawaz Kayani & Tonmoy Choudhury, 2023. "Behavioral Risk Preferences and Dividend Changes: Exploring the Linkages with Prospect Theory Through Empirical Analysis," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 24(4), pages 517-535, December.
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    Keywords

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    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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