What determines dividend policy: A comprehensive test"job"

What determines dividend policy: A comprehensive test
Tao Zeng. Journal of American Academy of Business, Cambridge. Hollywood: Mar 2003. Vol. 2

“This paper designs an empirical work to investigate the determinants of corporate dividend policy under the Canadian situation. It shows that firms pay dividend as a signal and to reduce agency costs. It also shows that liquidity and tax clientele effect are related to dividend policy”

1. INTRODUCTION
à There is a big deal “Why firms pay dividend”
à Why? Some researchers:
Dividend as servers as signal to shareholders
Can reduce agency cost and enforce manager to act in the interest shareholders
Because clientele effects exist
à This research differs from prior researches on 3 important ways:
1. Examines the relationship between firm-specific characteristic and dividend policy
2. This study designs the test using corporate financial data, rather than taking a surveys study.
3. This study makes comprehensive test of the determinant of dividend policy

2. THE FACTORS EFFECTING DIVIDEND POLICY
2.1. Tax clientele à . Tax clientele hypothesis argues that tax clienteles prefer different dividend policies, and investors may attach to firms that have dividend policies appropriate to their particular tax circumstance
2.2. Agency cost à dividend gives a mechanism for restricting managerial discretion. It reduces the agency cost of free cash flow by cutting down the cash available for spending at the discretion of management.
2.3. Signaling à dividend are paid to communicate information to investors about firm future prospect
2.4. Corporate liquidityà . A high degree of liquidity might be expected to encourage dividends by enabling high dividends to be paid without resort to external finance
3. TEST METHOD, DATA COLLECTION AND VARIABLES
3.1. Data collection and variables
à Data collected from “Canadian Financial Post Card” years 1984-88
Sample: firm that have criteria (1) availability of accounting data on the financial Post Card for the time period of 6 years from 1984-88 (2)not in the financial, insurance or real estate à 313 company from 1565 observation
Hypothesis: dividend payout is positively related to the percentage of major institutional shareholders, and negatively related to the percentage of major individual shareholders
à Variables:
Dividend paid or declared per share
Dividend payout ratio
Dividend yield

3.2. Test method
à First classifying firm into two groups; those who paying dividend (242) firm and not (71 firm) à compare the means à assessed using a t-test for each à *see the paper – can not be simply*
4. RESULTS (The results are shown in table 1-6)
4.1. Tax clientele àfirms paying dividends have significantly higher institutional ownership than firms not paying dividends and the individual ownership for pay-- dividend firms are lower but not significantly than non-paying-dividend firms.
4.2. Agency cost àfirm size is significantly positively related to dividend per share or dividend yield and positively correlated to agency cost
4.3. Signaling à current earnings and cash flow can estimate share price much better for firms not paying dividends than firms paying dividends.
4.4. Liquidity à the evidence that strongly supports the liquidity hypothesis
4.5. Other results à ***
5. CONCLUSION
This paper examines the determinants of dividend policy in the Canadian situation. It is argued that there may exist benefits for paying dividends, in order to compensate the tax disadvantage. Paying dividends may communicate additional information about firms= future profitability - signaling hypothesis. Dividends may be paid to tax-exempt or tax-deferred investors, or investors with lower effective tax rate - tax clientele hypothesis. Dividends may also be used to bond managerial discretionary behavior - agency theory. Finally, firms may pay dividends if no investment opportunities available - liquidity hypothesis