Dividend Policy and Its Relationship to Investment and Financing Policies: Empirical Evidence Using Irish Data

By Green, Peter; Pogue, Michael et al. | IBAR, January 1, 1993 | Go to article overview

Dividend Policy and Its Relationship to Investment and Financing Policies: Empirical Evidence Using Irish Data


Green, Peter, Pogue, Michael, Watson, Iain, IBAR


INTRODUCTION

This paper investigates the relationship between dividend, investment and financing decisions. The empirical evidence is based upon a questionnaire survey of those companies listed on the Irish Stock Market in 1989. Recent research has concentrated on examining the dividend policies pursued by Irish companies by way of an analysis of published financial data (see, for example, Barrett and Cotter 1990 and Green and McIlkenny 1991). A questionnaire approach is adopted in this paper, so that the perceptions of those managers who actually formulate dividend policy can be examined. Furthermore, the relationship between dividend, investment and financing decisions can be explicitly investigated.

The results of the survey support the contention that the level of dividend payments is not residually determined, ie dividend levels are not totally dependent upon the values selected for investment and financing variables. The question of independence between dividend and investment policies is a more contentious issue. The empirical evidence presented here, however, does suggest that at least at the aggregate level, dividend decisions are taken with reference to the exogenous factor of dividend stability, but consideration is also given to investment and/or financing decisions. Thus it would appear that a simultaneous dividend policy, ie the dividend decision is neither totally residual nor totally independent, is pursued by Irish companies.

The remainder of this paper is organised as follows: First a brief review of previous literature is provided; second the sample and methodology employed in the study are then outlined; thirdly, the results and implications are evaluated; next, some of the limitations of the study are discussed; and the paper concludes with a brief summary of the main results of the study.

PREVIOUS LITERATURE

There have been previous surveys of dividend policy, although none have been conducted in Ireland. Lintner (1956) developed a model to explain the intertemporal behaviour of dividend levels as a result of interviews with the managements of 28 US firms. The model assumes that a firm's target dividend level in year t (Dt*) is related to the earnings in that year (E sub t ) by a target payout ratio (r). This payout ratio is a function of the firm's borrowing and investment opportunities and shareholders' marginal tax bands:

(1) Dt* = rE sub t

Furthermore, it is argued that, in any given year, the firm will only partially adjust towards the target dividend level of the year. The extent of the adjustment is represented by the speed of adjustment factor (c), which reflects the degree of acceptance of the new target. Hence, the actual change in dividends from period t-1 to t is given by:

(2) D sub t -D sub t-1 =a + c(D sub t *-D sub t 1) + U sub t

The constant term (a) is introduced as a somewhat arbitrary way of reflecting the reluctance of management to reduce dividends. U sub t is an error term. Substituting equation (1) into equation (2) produces the familiar equation used in studies of dividend policy:

(3) D sub t -D sub t-1 =a + crE sub t -cD sub t-1 , + U sub t

Stewart (1987), Barrett and Cotter (1990) and Green and McIlkenny (1991) provide empirical evidence from an analysis of published financial data, both at the aggregate and individual firm level, which supports the contention that the Lintner (1956) model is descriptive of the dividend policies pursued by Irish companies. Green and McIlkenny (1991), however, find the constant term in the model to be statistically insignificant, whilst Barrett and Cotter (1990) suggest that there is a strong tendency for Irish companies to maintain dividends at constant levels. Such studies have provided a valuable insight into the dividend policies of Irish companies, but have provided relatively little information about the relationship between dividend, investment and financing decisions. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Dividend Policy and Its Relationship to Investment and Financing Policies: Empirical Evidence Using Irish Data
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.