Effects of Inflation on Dividend Payments: An Empirical Study of Public Companies in Hungary

By Basse, Tobias | International Journal of Management, March 2013 | Go to article overview

Effects of Inflation on Dividend Payments: An Empirical Study of Public Companies in Hungary


Basse, Tobias, International Journal of Management


This paper examines dividend policy issues in Hungary. The results reported in this study suggest that dividend signalling is not of any relevance. However, there are clear signs for dividend smoothing. Thus, managers in Hungary seem to fear the need to cut or omit dividends and therefore try to avoid the dividend reductions in the nearer future by only gradually increasing dividend payouts as a reaction to rising corporate profits. Moreover, the empirical evidence reported in this study does give support to the assumption that the negligence of inflation can distort tests for dividend smoothing and dividend signalling.

(ProQuest: ... denotes formulae omitted.)

Introduction

In spite of many research efforts there still at best is an imperfect understanding of the fact that managers seem to assign some importance to the formulation of the dividend policies of their firms. Different approaches have been suggested to explain why firms do pay dividends. However, examining the numerous empirical studies that do exist gives no clear picture. Recently, it has been argued that the negligence of inflation could be one explanation for the observation that there is no indubitable empirical evidence supporting specific theories of dividend determination (see Basse (2009) and Basse et al. (2011)). Meanwhile, this point of view has become quite popular. However, Basse and Reddemann (2011) have argued that additional empirical research examining data from emerging economies could be of interest because inflation rates in these countries tend to be more volatile. Therefore, this study analyses dividend policy issues using data from Hungary - one of the leading emerging markets in Eastern Europe.

Literature Review

In a widely cited paper Miller and Modigliani (1961) have argued that the dividend policy of a firm is irrelevant. They assume that the investment policy of the firm is given, that capital markets are perfect and that taxes do not exist. Under these circumstances higher dividends simply result in lower capital gains and the dividend policy of a firm is therefore without any economic relevance - at least when investors do not prefer dividends to capital gains or vice versa. This dividend irrelevancy hypothesis creates some problems for financial economists trying to explain why dividends do exist. In fact, there seems to be a dividend puzzle because it can be observed that numerous firms in many countries regularly decide to pay dividends (e.g., Black (1976) and Mann (1989)). Accepting the dividend irrelevancy hypothesis it should be a major surprise that managers generally seem to believe that it is of some importance for their firm to follow an appropriate dividend policy. Brav et al. (2005), for example, have used survey and field interviews documenting the special importance U.S. managers assign to the payout policy of their firms.

Corporate finance theory has made some suggestions for the relevance of dividends. These approaches to explain why managers decided to pay dividends usually are based on agency theory. The management of a firm is not necessarily acting in the best interest of the owners (see, for example, Stulz (1990) and Gugler (2003)). In fact, it is quite common to argue that dividend payments lead to a reduction of free cash flow and thereby force the management of a firm to obtain capital from external sources more frequently when new investment projects have to be financed. Trying to raise new capital forces a firm to give information to investment bankers, prospective investors and other economic agents reducing agency costs.

Moreover, dividend changes can help to overcome information asymmetries. According to the so-called dividend signalling theory managers do adjust dividends to signal changes to expected future earnings to financial markets (e.g., Asquith and Mullins (1986) and Denis et al. (1994)). This approach seems to be the most popular explanation for the existence of dividend payments. …

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

Items saved from this article

This article has been saved
Highlights (0)
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.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
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, APA and Chicago citation styles.

(Einhorn, 1992, p. 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.

Cited article

Effects of Inflation on Dividend Payments: An Empirical Study of Public Companies in Hungary
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

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, 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."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.

    Author Advanced search

    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.