Market Value and Aggregate Dividends: A Reappraisal of Recent Tests, and Evidence from European Markets

This paper addresses the relationship between aggregate dividend payments and maiket capitalization as related to the firm's dividend decision. Most previous work concentrates on the US; we extend these studies to the different institutional framework represented by West Germany, France, the UK, and Switzerland. The observation that managers smooth dividend changes in relation to changes in permanent earnings (MARSH/MERTON [1987]) seems also to be true for European countries. The hypothesis of a long-run target payout ratio is tested by estimating cointegrated processes. Integration of the same order for both series is a necessary condition for this hypothesis to hold. We use a recent test strategy proposed by PERRON [1988] to test for a unit root in the time series. There is evidence for non-stationary nominal and real logarithmic capitalization as well as real log dividend series, whereas the logarithm of nominal dividends is stationary. Cointegration is therefore tested only for real magnitudes. On the 5% percent significance level non-cointegration can be rejected only for the UK. This finding casts doubt on the validity of earlier tests derived from specific error correction formulations, such as the MARSH/MERTON [1987] dividend model.