The More, the Merrier: An International Analysis of the Frequency of Dividend Payment
by
Stephen P. Ferris Department of Finance University of Missouri-Columbia Phone: 573-882-9905 Email:
[email protected]
Gregory Noronha Milgard School of Business University of Washington Tacoma Phone: 253-692-5628 Email:
[email protected]
Emre Unlu Department of Finance University of Missouri-Columbia Phone; 573-884-7708 Email:
[email protected]
May 2007
We would like to acknowledge comments by Paul Brockman and Raynolde Pereira on an earlier version of this manuscript.
The More, the Merrier: An International Analysis of the Frequency of Dividend Payment Abstract The joint contributions of prospect theory and mental accounting imply that investors receive a higher utility when a given level of dividends is paid more frequently, suggesting that dividends should be paid as often as possible. Consequently, we examine the frequency with which dividends are paid around the world and what factors influence the choice of frequency. We find that dividend payment frequency differs internationally. From our multivariate analysis, we determine that non-behavioral factors such as the legal regime as well as the level and standard deviation of operating income exert significant influences on the payment frequency of dividends. Further, we document a positive relationship between payment frequency and the market-to-book ratio which we interpret as evidence that payment frequency has implications for firm value. Keywords: dividends; payment frequency; prospect theory JEL Codes: G35, C23
The More, the Merrier: An International Analysis of the Frequency of Dividend Payment
1.
Introduction Although dividend policy is one of the most intensely studied areas of corporate finance,
the issue of how frequently the firm should make dividend payments to its shareholders remains unexplored. The previous literature in corporate payout policy examines the decision to pay or not to pay dividends (e.g, Fama and French, 2001; DeAngelo et al. 2004; Baker and Wurgler, 2004a, b), how much to pay (Rozeff, 1982; Miller and Rock, 1985), or how to pay – repurchases versus dividends (Stephens and Weisbach, 1998; Jagannathan et. al., 2000). But no study examines how frequently the firm should pay dividends once the decision to pay has been made. One might argue that once the level of payout is decided, the frequency of payment is only of secondary importance and that reporting conventions or other regulatory guidelines might determine the dividend payment schedule. Such an argument, however, ignores the higher utility derived by investors from receiving more frequent payments implied by the prospect theory of Kahneman and Tversky (1979) and Thaler’s (1980) mental accounting.
These theoretical
developments jointly imply important predictions regarding the frequency with which investors prefer to receive dividends. Prospect theory contends that the utility function of investors is concave over the domain of gains. Thaler (1980) subsequently describes the process of mental accounting by which investors evaluate their gains separately from their losses, and thereby increase their overall utility. These arguments suggest that an investor receives a higher level of utility from a sequence of smaller discrete payments than a single aggregate payment. The separate valuation by investors of individual gains over a concave utility function influences how a stream of dividend payments will be valued. More specifically, it suggests that the frequency with 2
which dividends are paid will positively effect an investor’s valuation of a total dividend distribution. Barberis and Thaler (2003) describe how the concave utility function of prospect theory allows an investor to receive greater utility from a $2 dividend and an $8 capital gain compared to a $10 capital gain in spite of an identical dollar increase in shareholder wealth. In the case of the dividend and capital gain bundle, the investor receives utility from two distinct sources, each of which is separately evaluated across the investor’s concave utility function. The capital gain, however, provides only one source of wealth for the investor to evaluate. Barberis and Thaler note that this differential bundling of the shareholder distribution produces two different levels of investor utility. The investor that receives the ten dollars bundled as a $2 dividend and a $8 capital gain experiences a higher level of utility compared to the investor who receives only a $10 capital gain. From this example of how investor utility is influenced by the bundling of wealth increases into discrete gains, we can readily apply prospect theory to assess the utility resulting from a given payment frequency of dividends. Consider the previous example discussed by Barberis and Thaler (2003) whereby a firm pays a $2 annual dividend and a $8 capital gain. If the firm elects to pay that dividend in the form of $0.50 per quarter, the investor now has four individual dividends to evaluate rather than one. Because of the concavity of his utility function, these four dividends will provide the investor with a total greater utility than one annual dividend of $2 in spite of their identical total dollar amount. To the extent that dividends are paid more frequently, investors are able to code each individual dividend as a separate gain, resulting in a higher level of total utility than if the dividend was paid at once and viewed as a solitary gain. Hence, the choice of payment frequency determines the amount of utility an investor receives from a given payout level.
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Barberis and Huang (2001) make the case that if a stock’s recent performance is good, an investor’s utility increase from the gain leads that investor to become less concerned about future losses from the stock and, consequently, to view the stock as less risky. Thus, the investor is willing to discount future cash flows from the stock at a lower rate. To the extent that investors code more frequent dividends as more frequent gains, a situation which closely parallels the birdin-the-hand argument, we should expect stocks paying dividends more frequently to have higher valuations because investors perceive them to be less risky, other things equal. Although the theory of Kahneman and Tversky (1979) and the confirming simulations and modeling of Barberis and Thaler (2003) and Barberis and Huang (2001), imply that a more frequent payment of dividends increases total investor utility, we nevertheless observe that there is significant international cross-sectional variability in the frequency of dividend payment. We examine the issue of dividend payment frequency for a sample of over 6,800 firms distributed across 32 different countries and find that payment frequencies cluster around three periodicities— annual, semi-annual, and quarterly. The existence of low payment periodicities such as annual or semi-annual suggest that there are factors beyond prospect theory and the mental accounting of investors which influence the frequency of dividend payment. One such factor might be the legal regime in which the dividend-paying firm is incorporated and the nature of the legal protections it affords minority shareholders. LaPorta et. al. (2000), for instance, find that firms in strong investor protection countries pay more dividends than those incorporated in less favorable regimes. LaPorta et. al. argue that shareholders in these countries are better able to force cash disgorgement, thus precluding insiders from using a high percentage of the firm’s earnings for personal benefits. By examining the frequency of dividend payment across legal regimes, our study investigates whether the level of investor protection also impacts the speed of managerial disgorgement once the decision to distribute dividends has been 4
made. Consequently, this analysis provides insights into how the level of investor protection shapes yet another dimension of corporate payout policy payment frequency. Indeed, our empirical results show that there is a pronounced difference in dividend payment frequency relative to legal regime.
We find that shareholders invested in firms
incorporated in common law countries receive their dividends, on average, twice as frequently as those in civil law countries. Lintner (1956) establishes in the literature that firms are reluctant to cut dividends for their shareholders. Subsequent studies (e.g., Ghosh and Woolridge, 1988; Denis et al., 1994) show that firms are penalized in the marketplace when they do reduce them. Consequently, researchers (e.g., Jagannathan, Stephens and Weisbach, 2000) now view dividends as a continuing commitment to pay, with the firm distributing only permanent cash flows to its shareholders. We contend that the nature of these permanent cash flows not only determines the ability of the firm to pay dividends, but influences the frequency with which it elects to pay them. The level of the firm’s permanent cash flow directly affects its ability to maintain dividends at previous levels. At low levels of permanent cash flow, it becomes more probable that the firm will be unable to sustain the current dividend payout. If the firm is also committed to a frequent payout schedule, the incidence of shareholder disappointment is also likely to increase. This failure of dividends to match expected payment levels results in reduced investor utility. The frequency of that disappointment is directly related to the dividend payment frequency. Because firms wish to avoid investor disappointment, we hypothesize that lower levels of permanent operating cash flow are associated with a reduced frequency of dividend payment. Related to this analysis is the relation between dividend payment frequency and the volatility of operating income. As operating income volatility increases, it becomes more uncertain whether the firm will be able to meet existing dividend payout levels. The mental accounting 5
process of investors will cause them to code the shortfall between the realized and the expected dividend as a loss, thereby reducing the overall utility of the dividend. With more frequent dividend payments, the firm increasingly is required to match its operating income against the benchmark of previous dividends. With higher volatility in operating income, it becomes increasingly likely that shareholders will be disappointed. Again, since firms attempt to avoid shareholder disappointment in the design of their dividend policy, we expect that dividend payment frequency will be inversely related to the volatility of its operating income. Our empirical results are consistent with the hypothesized effects of operating income on the frequency of dividend payment. Specifically, we find that the level of a firm’s operating income is directly related to the frequency of dividend payment. As firms enjoy higher levels of permanent operating income, they appear more willing to commit to a higher frequency of dividend payment. Further, we find that that volatility of operating income is inversely related to the payment frequency of dividends. This suggests that firms consider the variability in income as they establish the payment frequency of dividends. Since we contend, in this paper, that the frequency of dividend payment is a decision variable, it becomes important to establish a relationship between payment frequency and firm value. We show that, in both a univariate and multivariate setting, a significant positive relationship exists between payment frequency and a firm’s market-to-book decile. We interpret this as evidence that, ceteris paribus, a higher dividend payment frequency is a value enhancing decision. We organize the remainder of this paper as follows. In section two we provide a discussion of our data and the process used in sample construction. We provide an initial profile of the international distribution of dividend payment frequencies, including a separate analysis for dividend initiators in section three. Section four presents our discussion and empirical analysis of 6
the determinants of dividend payment frequency. We conclude with a brief summary and discussion of our findings in section five.
2.
Data and sample construction The data used in this study are drawn from a variety of sources. We obtain annual financial
and accounting data from the Compustat Global Industrial database, while monthly market return information is collected from the Compustat Global Issues database. The nature of the legal regime for our sample countries is obtained from the classification reported in LaPorta et al (2000). Dividend payment frequency is not a reported variable on the Compustat database, forcing us to construct it. We estimate dividend payment frequency by counting the number of dividends distributed to shareholders during the course of a fiscal year. We begin our analysis by selecting as our sample period the years 1995 through 2005, which provides a time-series of adequate length and is sufficiently current. We then limit our sample of countries to those studied by LaPorta et. al. (2000) so that established measures for the degree of investor protection can be used. This results in a sample of thirty-two countries, consisting of twenty-one civil law nations and eleven common law nations. 1 These countries are listed in Table 1. The identification of our sample firms occurs in several steps. We begin by excluding those firms operating in the regulated industries of financials, utilities, and real estate. We then match those firms contained on the Compustat Global Industrial database with those appearing on the Compustat Global Issues database. We further eliminate those firms with missing monthly dividend per share data during the fiscal year or that change fiscal years, as well as firms missing ___________________________ 1
In a series of papers, LaPorta et. al. (1997, 2000, 2002, 2006) compare common and civil law regimes and their relative attractiveness to investors. The essential differences between these two regimes reside in the level of investor protections for outside or minority shareholders, the voting rights of shareholders, and the quality of the enforcement of existing securities/corporate laws.
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data for other accounting and financial variables used in the empirical analysis. After the application of all these filters our final sample consists of 35,976 firm-year observations.
3.
Sample Characteristics 3.1
Country and industry patterns in the frequency of dividend payment
In Table 1 we present a percentage distribution of the dividend payment frequencies for firms incorporated in each of our sample countries. In spite of frequency clustering in some important markets such as the U.S. and the U.K., we observe substantial within-country variation for much of our sample. Japan, for instance, demonstrates a split between annual (42%) and semiannual payers (58%) as do Singapore (59% pay annually; 39% pay semi-annually), Malaysia (55% and 41%, respectively), and Mexico (67% and 33%, respectively). Canadian payers are even more fragmented, with 12% paying annually, 11% distributing dividends semi-annually and 71% following a quarterly pattern. The results in Table 1 show that in spite of the predictions of prospect theory and mental accounting that frequent dividend payment provides greater investor utility, there exists substantial payment frequency variation, both within and between countries. Further, Table 1 suggests that payment frequency is a decision parameter in the overall design of a firm’s dividend policy. Figure 1 presents a histogram of the divided payment frequencies for our sample firms. Unlike the overwhelming popularity of the quarterly dividend payment in the U.S., we find that only 19.3% of the firms around the world elect to pay dividends at this frequency. 2 Indeed, the most popular global dividend payment frequency is semi-annually, representing 43.2% of our sample. Over a third of the sample (36%) pays dividends annually. Figure 1 emphasizes that there ___________________________ 2
We find in un-tabulated results that the average annual frequency of dividend payment for U.S. firms ranged from 3.94 in 1970 to a low of 3.77 in 2003, offering strong evidence for the dominant popularity of the quarterly dividend. Further, we find that of the 259 U.S. firms that changed their dividend payment frequency during 1970-2004, 214 (82.9%) changed to a quarterly distribution pattern.
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is an important difference in the frequency of dividend payment between the U.S. and the rest of the world, with most of the world’s firms paying dividends less frequently than their U.S. counterparts. In Table 1 we also estimate the median dividend payment frequency for each of our sample countries, and compare the dividend payment frequency between common and civil law countries. As noted previously, LaPorta et. al. (2000) find that shareholders of firms incorporated in countries with high levels of investor protection are better able to extract dividends from managers. Our results further complement this finding. We find that the median dividend frequency of firms located in common law countries is twice that of civil law countries. 3 Thus, not only do investors in high protection countries receive more dividends than their civil law counterparts, their payouts are distributed more frequently 4 . In Table 2 we provide an industry distribution of dividend payment frequency based on the North American Industry Classification System. The results reveal a remarkable consistency across industry classifications in a preference for semi-annual dividends. With few exceptions, most industries distribute their dividends twice annually, followed in popularity by annual dividends, with quarterly dividends the third most common frequency. Dividends thrice a year, or more frequently than quarterly, represent only insignificant percentages of industry totals. This finding of the popularity of less frequent dividend payments suggests that factors beyond mental accounting by investors are involved in the choice of payment frequency. 3.2 Univariate analysis Although prospect theory and mental accounting conclude that investors receive higher utility from a more frequent stream of payments, there are several other factors that might influence a firm’s choice of payment frequency. Beyond the protections provided to investors ___________________________ 3
Comparable to LaPorta et. al. (2000), we equally-weight all countries in our sample. In unreported results, we find that firms that initiate dividend payment during our sample period follow a payment frequency pattern that generally coincides with the mean payment frequency within their country of incorporation.
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based on their country’s legal regime, the nature of the firm’s permanent income also serves as a factor in explaining the choice of dividend payment frequency. As noted earlier, we hypothesize that higher levels of operating income are associated with more frequent dividend payments, while increased volatility of income reduces dividend payment frequency. LaPorta et. al. (2000) show that shareholders in common law countries are more successful in extracting dividends from managers than those of firms incorporated in civil law countries. We hypothesize that the legal culture operating in common law countries which allows investors to extract higher dividends, also facilitates their more frequent receipt of these distributions. We measure the level of investor protection provided to shareholders with two different variables. The first is a dummy variable that controls for the common or civil law regime as described by LaPorta et. al. (2000). The second is a dummy variable that assumes a value of one if the antidirector index constructed by LaPorta et al (1998) is greater than the sample median and zero otherwise. Since both of these variables capture the ability of shareholders to exercise greater control over cash distributions made by managers, we hypothesize that higher values will be positively associated with greater payment frequencies. We also examine two characteristics of the firm’s operating income since dividends are generally paid from the firm’s earnings. We use the approach of Stephens and Weisbach (1998) for estimating a firm’s permanent cash flow in this analysis. One is the rank decile for the firm’s operating income scaled by the book value of assets averaged over the past four years. Since Stephens and Weisbach find that firms use relatively permanent cash flows to distribute dividends, we hypothesize that dividend payment frequency will be greater as mean operating income increases. The other aspect of operating income is designed to capture its variability and is the rank decile for the standard deviation of the scaled operating income. We anticipate that dividend
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payment frequency will be inversely related to this variable since it is a measure of uncertainty in the level of the firm’s earnings. In panel A of Table 3 we compare the incidence of high dividend payment frequency (i.e., payments made quarterly or more often) relative to medium/low dividend payment frequency (three or less times annually). We find that the high payment frequency firms are almost exclusively located in common law countries (99.43%), while only about a third of the low payment frequency firms are incorporated in common law countries (33.91%).
We obtain
comparable findings when we dichotomize our sample based on the level of anti-director rights, though there is a large percentage of firms in civil law countries with high levels of anti-director rights. The high payment frequency firms also enjoy a significantly higher median operating income than the low payment frequency firms. We discover, contrary to expectations, that the high payment frequency firms experience a greater level of operating income volatility than firms that pay their dividends less frequently. We determine in our subsequent multivariate analysis, however, that this relation reverses itself after we control for other factors. Panel B represents a comparison of dividend payment frequency adjusted for the industry median payment frequency. We industry-adjust the dividend payment frequency in two steps. First we estimate the median dividend payment frequency across all firms in a given industry for each country. Then, we calculate the global industry median across the individual country industry medians. We then net this value from the corresponding firm dividend payment frequency observed. We apply a similar process to industry-adjust other variables subsequently used in this study. We obtain results consistent with those reported in Panel A. Firms paying dividends more frequently than the industry median are more commonly located in the common law and high anti-
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director rights countries. These high payment frequency firms also enjoy a greater median level of operating income. Panels C and D contain our analysis when dividend payment frequency is quarterly, semiannual, or annual. In Panel C we observe that the most frequent dividend payers are located in the common law and high anti-director rights index countries. As the dividend payment frequency declines, their relative incidence in the common law/anti-director rights index countries correspondingly declines. These high payment frequency firms also enjoy a greater median level of operating income. Panel D contains a similar analysis, but uses the industry-adjusted dividend payment frequency. The results are qualitatively similar to those obtained in Panel C. We conclude from the analysis presented in Table 3 that firms electing to pay their dividends most frequently are located in countries with strong investor protections. This means countries with a common law legal heritage or having a high value for their anti-director rights index. Further, we find that these more frequent payers enjoy a higher median level of operating income than those paying dividends less frequently.
4.
What are the determinants of dividend payment frequency? In this section we extend the univariate analysis of section 3 by examining the
simultaneous effect of legal protections available to equity investors, the level of the firm’s operating income, and the variability of its operating income on dividend payment frequency. In addition, we introduce a number of control variables into our analysis. We include a measure for the level of dividends paid in the event that the amount of dividends paid and their frequency are jointly made decisions in an effort to please investors while managing corporate cash flows: the rank decile for dividends standardized by earnings. LaPorta et al (2000) use this variable as well. Fama and French (2001) find that larger firms are more likely to pay dividends. Hence, we include 12
firm size as measured by the rank decile for the natural logarithm of the book value of assets. Fama and French also report that firms with more attractive growth opportunities are less likely to pay dividends. We measure a firm’s growth opportunities by its percentage growth decile rank in the annual book value of assets, where asset growth is calculated as the difference between the current year’s assets and the previous year’s assets scaled by the previous year’s assets. Finally, since firm profitability affects the cash available from which to pay dividends, we include the firm’s decile rank of return on assets where the return on assets is calculated as net income scaled by the book value of assets. 4.1 Estimates from the logistics regressions In Table 4 we present the results from a set of annual random effects logistic regressions between dividend payment frequency and a series of independent variables using the FamaMacBeth (1973) methodology. 5 Because we use country-specific variables as regressors, these variables are by construction collinear with country fixed effects. Nor can we estimate a firm fixed effects regression since the nationality of our sample firms is constant. Consequently, we estimate a set of random effects logistic regressions. We dichotomize dividend payment by creating a dummy variable that assumes a value of 1 if the dividend payment frequency is quarterly or more and zero otherwise. Quarterly dividend payment is selected as the benchmark frequency since that is the highest dividend frequency observed in our sample having a meaningful number of observations. We observe in Table 4 that both measures of investor protection, the legal regime and the anti-directors rights index, are significantly positive. This result confirms the univariate findings reported in Table 1 that high frequency payers are located more often in countries providing ___________________________ 5
We also estimate the logistic regression between dividend payment frequency and these independent variables using a pooled approach. The results do not significantly differ and our conclusions relative to investor protection, the level of operating income, and its volatility remain unchanged. Hence we do not separately report them for this section or for other analyses which report Fama-MacBeth (1973) coefficients.
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stronger investor protections. Operating income also influences the frequency of dividend payment. Higher levels of operating income increase the likelihood that the firm will pay dividends more frequently. Reversing our earlier univariate results, we find that greater variability in operating income reduces the likelihood that a firm pays dividends quarterly or more frequently. Higher operating income volatility increases the likelihood that earnings will be inadequate to satisfy dividend expectations. Further, as most recently noted by Brav et. al. (2005), managers are reluctant to reduce dividends. Consequently, the presence of greater operating income volatility will likely decrease a firm’s desire to pay dividends frequently in an attempt to reduce successive dividend disappointments for investors. Almost all the control variables are also statistically significant. We find that the level of dividends paid is significantly positive, indicating that larger dividends tend to be paid more frequently. Firm size is also significant and positive, suggesting that larger firms pay dividends more often. We also observe that firms with high growth rates, measured by the asset growth rate decile, to be inversely related to dividend frequency. Firms with alternative uses for their cash such as profitable internal investment projects appear to retain their earnings longer by distributing dividends less frequently. Finally, we note that firm profitability increases the likelihood that a firm will pay dividends frequently. It may be the case that profitable firms generate sufficient cash that allows the firm to pay dividends and to pay them frequently. We conclude from the empirical results that there are common determinants of dividend payment frequency. We find that the investor protection environment is an important factor in the frequency choice, suggesting that the greater legal empowerment of shareholders tends to result in the more frequent disgorgement of cash from the firm through dividends. Further, management is more likely to pay dividends frequently when its operating income is high, but exhibits lower volatility. 14
4.2 Multinomial logistics estimates In Table 5 we provide a more detailed analysis of the dividend payment frequency decision by estimating a series of multinomial logistic regressions. Our empirical examination in this section allows us to determine what factors influence the decision to pay dividends quarterly, semiannually or annually. Because of their extremely limited presence in our sample, we exclude payment frequencies of thrice a year or more frequently than quarterly. Unlike the results presented in Tables 4, the multinomial logit regressions in Table 5 allow us to compare the determinants of dividend payment frequency against each other. Specifically, Table 5 provides an individual analysis of the determinants of each payment frequency relative to the other payment frequencies which serve as benchmarks. Table 5 contains the Fama-MacBeth (1973) coefficients for our multinomial analysis with unadjusted data. Replication of Table 5 using industry-adjusted data provides quantitatively identical results and hence is not separately reported.
The results for the legal regime are
consistent with shareholders in common law countries receiving dividends more frequently. The impact of legal regime is most dramatic in the comparisons between annual and quarterly dividend payments, with all of the estimated coefficients highly statistically significant. That is, when the quarterly DPF is the benchmark (second column of Table 5) and the annual DPF is compared to it (last row of Table 5), firms paying annually, on average, are less likely to be situated in common law countries, have lower operating income that is more volatile, are smaller and have lower payout, and are less profitable and have higher asset growth. In general, we observe uniformly significant coefficients for the level and variability of operating income that are consistent with our hypotheses for these variables. Average operating income significantly increases the likelihood of more frequent dividend payment, irrespective of whether we compare annual against quarterly, annual against semi-annual, or semi-annual payment 15
against a quarterly payment frequency. The variability of operating income, however, significantly reduces the likelihood of more frequent dividend payments. This effect holds across all the various pair-wise frequency comparisons. The control variables included in the logistic regression are generally statistically significant and possesses the hypothesized sign. The dividend amount as measured by the standardized dividend decile is consistently significant and positive, confirming our expectation that the payment of higher dividends increases the likelihood that dividends will be paid more frequently. We find that larger firm size also increases the likelihood that a firm will distribute its dividends to shareholders more frequently. Firm profitability is yet another positive influence on the likelihood of increased dividend payment frequency. Although the results are not always significant, we find that our measures of alternative investment opportunities available to the firm are usually inversely related to the frequent payment of dividends. The asset growth decile reduces the likelihood that firms pay dividends more frequently. This result is consistent with the inverse relation between investment opportunities and the dividend payout ratio already established in the literature. It also supports our conjecture that firms with attractive internal investment projects are less willing to pay dividends frequently since they have identified other uses for these funds. 4.3 Effect on Valuation If the dividend payment frequency is a decision variable, it is natural to expect that choice of frequency be made with a view to enhancing value. LaPorta et al (2002) show that common law countries have higher valuations, as proxied for by Tobin’s q, than do civil law countries. To test the hypothesis that higher dividend payment frequency is associated with higher valuations we perform both univariate and multivariate analyses using the market-to-book ratio as a proxy for value 6 . Our results are in Table 6. In panel A, we categorize high dividend frequency (DPF) firms ___________________________ 6
LaPorta et al (2002) also use the market-to-book ratio as a proxy for Tobin’s q.
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in two different ways. We use a HI_DPF dummy which takes value 1 when DPF is quarterly or higher, and 0 otherwise. We also use a DPF dummy which takes values of 4 for quarterly frequency, 2 for semi-annual, and 1 for annual. When high HI_DPF is used, high payment frequency firms are in a significantly higher mean or median market-to-book decile than low frequency firms. When we use DPF, we once again observe a monotonic and significantly different order for the mean and median market-to-book decile. Firms with higher dividend payment frequencies appear more valuable, on average, than those with lower payment frequencies. In the random effects multivariate analysis in panel B, we regress a firm’s market-to-book decile on dividend payment frequency together with several control variables. Whether we use the HI_DPF dummy, or the DPF dummy, both are consistently positive and significant. Our control variables for legal regime, size, and asset growth remain significant with the hypothesized signs. Thus, we conclude that, in a global context, and after controlling for the legal regime, there is a positive relationship between dividend payment frequency and firm value. 4.4 Robustness tests In this section we report the results from a series of robustness tests regarding our multivariate analysis of dividend payment frequency. Specifically, Table 7 contains our findings resulting from a series of changes in the sample composition. In the first set of robustness tests, we examine whether our results are due to the effect of a large capital markets. These excluded markets, U.S. and Japan, are the most heavily capitalized in the world. By excluding them individually as well as jointly from the sample, we can determine if our results are driven by the presence of one of these large markets in our sample. We determine that the effect of legal regime and the nature of the operating income stream on the payment frequency of dividends is not driven by the inclusion of large outlier markets, and that the positive 17
association between payment frequency and value as proxied for by the market-to-book ratio is unaffected as well. We repeat two sets of regressions. In the first case, based on model 4 in Table 6 where the market-to-book ratio is the dependent variable, we see that the coefficient on DPF remains positive and significant when large markets are excluded. In the second case, where the High DPF dummy is the dependent variable and the regression model used is model 7 in table 4, the independent variables likewise remain significant with the hypothesized sign. In our second robustness test, we control for any corporate liquidity effects that the East Asian currency crisis of 1997 might have had on dividend payment frequency. We accomplish this by eliminating all observations for firms incorporated in Malaysia, Thailand, Philippine Islands, and Indonesia. We find that this adjustment has no effect on the significance of the selected coefficients. Deleting all the large markets as well as those affected by the Asian crisis has no effect on our results either.
5.
Conclusions This study investigates a heretofore unexamined aspect of dividend policy—the frequency
with which a firm elects to pay its dividends to shareholders. The behavioral insights of prospect theory (Kahneman and Tversky, 1979) and process of mental accounting developed by Thaler (1980) jointly suggest a dividend payment schedule that emphasizes frequency in an attempt to increase investor utility. We find, however, a substantial global variation in dividend payment frequency. Rather than a dominant and highly frequent pattern of dividend payment, we find that there is a clustering around three payment periodicities —annually, semi-annually and quarterly. Indeed, the most common frequency for dividend across global capital markets semi-annual, which is relatively infrequent from a U.S. perspective.
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We conclude from our analysis that there are effects beyond that identified in prospect theory and mental accounting that influence the frequency with which dividends are paid. We observe, for instance, that there is an important distinction between legal regimes, with shareholders in common law countries receiving their dividends twice as frequently as their civil law counterparts. This result also holds for a sample of dividend initiators. Beyond the effect of legal regime, we find that the level and standard deviation of the firm’s operating income exert significant influences on dividend payment frequency. Firms with higher levels of permanent operating income tend to pay their dividends more frequently. We find, however, that firms with more variable levels of operating income pay their dividends less frequently, perhaps in an attempt to reduce investor disappointment when earnings are insufficient to satisfy dividend expectations. Since we argue that the dividend payment frequency is a decision variable for firm management, it becomes necessary to show that the decision is linked to firm value. Our analysis indicates that there is a positive relationship between payment frequency and value as proxied for by the firm’s market-to-book ratio. While we demonstrate that this association exists, we acknowledge that there may be reasons in addition to prospect theory and mental accounting for it. For instance, dividend payment frequency might be related to the usefulness of dividend signaling as a way of conveying managerial expectations regarding future firm performance. The dividend signaling models of Bhattacharya (1979), Hakansson (1982), and Miller and Rock (1985) are centered on the information content of dividends. In these models, dividends are viewed as containing information about the firm’s future earnings. If dividends are paid less often, the firm is correspondingly less able to signal this information to the marketplace and the market has less data with which to value the firm. Merton (1987) develops a model of capital market equilibrium in which individuals limit their investment to only those securities of which they are aware. 19
Consequently, firm value is an increasing function of the breadth of investor cognizance. While focusing on the value implication of information collection and distribution activities of third parties—securities analysts, Chung and Jo (1996) note, but do not test, that activities of managers might have a similar effect. It is possible that dividend payment frequency is one such managerial activity that can affect the degree of investor recognition of a stock and willingness to hold it in a diversified portfolio. Less frequent dividend payments means fewer dividend announcements and less overall news about the firm’s earnings and dividend-related activities. To the extent that this results in less investor cognizance of the firm, investors will require higher rates of return to hold the shares of unknown or obscure issuers. This suggests that dividend payment frequencies and changes in those frequencies might influence the level of investor awareness of a security and its consequent valuation in the marketplace.
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References Baker, M., and J. Wurgler, 2004a. A catering theory of dividends. Journal of Finance 59, 1125-1165. Baker, M., Wurgler, J., 2004b. Appearing and disappearing dividends: the link to catering incentives. Journal of Financial Economics 73, 271-288. Barberis, N. and M. Huang, 2001, Mental accounting, loss aversion, and individual stock returns, Journal of Finance 56, 1247-1292. Barberis, N. and R. Thaler, 2003. A survey of behavioral finance. In Handbook of the Economics of Finance. Ed. By G. Constantinides, M. Harris and R. Stulz. Elsevier. Bhattacharya, S., 1979. Imperfect information, dividend policy, and "the bird in the hand" fallacy. Bell Journal of Economics 10, 259-270. Brav, A., Graham, J., Harvey, C. and R. Michaely, 2005. Payout policy in the 21st century. Journal of Financial Economics 77, 483-527. Chung, K., Jo, H. 1996. The impact of security analysts’ monitoring and marketing functions on the market value of firms. Journal of Financial and Quantitative Analysis 31, 493-512. DeAngelo, H., DeAngelo, L., Skinner, D., 2004, Are dividends disappearing? Dividend concentration and the consolidation of earnings, Journal of Financial Economics 72, 425-456. Denis, D., Denis, D. and A. sarin, 1994. The information content of dividend changes: Cash flow signaling, overinvestment, and dividend clienteles. Journal of Financial and Quantitative Analysis 29, 567-587. Fama, E., and K. French. 2001. Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60 (April): 3-43. Fama E., and MacBeth J., 1973. Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 81, Issue 3, 607-636. Ghosh, C., and R. Woolridge, 1988, An analysis of shareholder reaction to dividend cuts and omissions, Journal of Financial Research 11, 281-294. Hakansson, N., 1982. To pay or not to pay dividends. Journal of Finance 37, 415-428. Jagannathan, M., Stephens, C., Weisbach, M., , 2000. Financial flexibility and the choice between dividends and stock repurchases. Journal of Financial Economics 57, 355-384. Kahneman, D. and A. Tversky, 1979. Prospect theory: an analysis of decisions under risk. Econometrica 47, 263-291. 21
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1997. Legal determinants of external capital. Journal of Finance 52, 1131-1150. La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1998. Law and Finance. Journal of Political Economy 106, 1113 - 1155. La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 2000. Agency problems and Dividend policies around the world. Journal of Finance 55,1-33. La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 2002. Investor protection and corporate valuation. Journal of Finance 57, 1147-1170. La Porta, R., F. Lopez-de-Silanes, and A. Shleifer, 2006. What works in securities laws? Journal of Finance 61, 1-32. Lintner, J. 1956. Distribution of income of corporations among dividends, retained earnings, and taxes. American Economic Review 88, 537-558. Merton, R. 1987. A simplified model of capital market equilibrium with incomplete information. Journal of Finance 42, 483-510. Miller, M. and K. Rock, 1985. Dividend policy under asymmetric information. Journal of Finance 40, 1031-1052. Rozeff, M., 1982. Growth, beta and agency costs as determinants of dividend payout ratios, Journal of Financial Research 5, 249-259. Stephens, C.P. and M. Weisbach, 1998. Actual share reacquisition in open-market repurchase programs. Journal of Finance 53, 313-333. Thaler, R., 1980, Toward a positive theory of consumer choice, Journal of Economic Behavior and Organizations 1, 39-60.
22
Figure 1 Global distribution of dividend payment frequency
Global Dividend Payment Frequency Histogram 50.0% 40.0%
36.0%
43.2%
30.0% 19.3%
20.0% 10.0%
1.2%
0.4%
0.0% 1
2
3
4
≥5
Dividend Payment Frequency (DPF)
Sample period is 1995-2005. The sample has 35,976 firm-year observations from 32 countries. Dividend payment frequency (DPF) is defined as the total number of times that a firm pays a dividend during a fiscal year.
Table 1 Global distribution of dividend payment frequencies This table presents the median dividend payment frequency (DPF) for each country for different sub-periods and legal regime between 1995 and 2005. The dividend payment frequency is defined as the total number of times that a firm pays a dividend during the fiscal year. Panel A: Median dividend payment frequencies Country
Number
Median DPF
Argentina Austria Belgium Denmark Finland France Germany Indonesia Italy Japan Korea Mexico Netherlands Norway Philippines Portugal Spain Sweden Switzerland Taiwan Turkey Civil Law Median
10 186 68 404 272 281 1120 344 326 13791 408 18 477 212 37 55 302 430 367 14 22
2 1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 2 1 1 1 1 1
Australia Canada Hong Kong India Ireland Malaysia New Zealand Singapore Thailand United Kingdom Unites States Common Law Median
1002 892 383 89 52 1542 75 825 185 4623 7164
2 4 2 1 2 1 2 1 1 2 4 2
Full Sample
1
Panel B: Test of medians (p-value for z-test) 0.0037 Civil vs. Common Law
Annual 40% 94% 99% 99% 91% 89% 97% 83% 96% 42% 92% 67% 75% 91% 65% 98% 31% 99% 88% 100% 100% 11% 12% 17% 67% 4% 55% 8% 59% 61% 7% 5%
Frequency of Dividend Payment Semi-annual Quarterly Other 20% 30% 10% 6% . . 1% . . 1% . . 9% . . 11% . . 3% . . 15% 0% 2% 4% . . 58% . 0% 8% . 0% 33% . . 25% . 0% 9% . . 14% 14% 8% 2% . . 49% 9% 12% 1% . . 11% . 1% . . . . . . 84% 11% 76% 26% 94% 41% 88% 39% 38% 92% 4%
0% 71% 3% 2% . 1% . 0% 1% 0% 87%
5% 6% 3% 4% 2% 3% 4% 2% 1% 1% 3%
Table 2 Industry distribution of dividend payment frequencies This table presents the dividend payment frequency distribution for 16 different industries over the 1995-2005 sample period. Industry classifications are based on the North American Industry Classification System (NAICS).
NAICS Industry Definition
2-Digit NAICS
Dividend Payment Frequency (Percent within industry)
Number 1
2
3
4
≥5
Agriculture, Forestry, Fishing and Hunting
11
389
48.1
40.9
1.8
9.0
0.3
Mining
21
798
19.9
33.1
1.5
43.5
2.0
Construction
23
1,962
48.9
44.1
0.7
6.2
0.1
31-33
20,410
35.8
41.2
1.2
21.5
0.4
42
2,952
39.7
45.1
0.9
14.1
0.2
Retail Trade
44-45
2,421
28.5
50.7
1.0
19.3
0.5
Transportation and Warehousing
48-49
1,803
35.0
46.4
1.7
16.6
0.3
Information
51
1,593
31.8
42.6
1.6
23.9
0.1
Professional, Scientific and Technical Services
54
1,493
43.1
43.5
1.1
12.1
0.3
Management of Companies and Enterprises
55
21
23.8
76.2
-
-
0.0
Administrative and Support and Waste Management
56
642
33.3
51.4
1.2
13.6
0.5
Educational Services
61
143
45.5
42.0
-
11.9
0.7
Health care and Social Assistance
62
156
27.6
43.6
3.2
25.0
0.6
Arts, Entertainment and Recreation
71
277
33.9
59.2
1.8
4.7
0.4
Accommodation and Food Services
72
751
31.0
54.1
0.8
13.7
0.4
Other Services (except Public Administration)
81
165
30.9
41.8
2.4
24.8
0.0
35,976
36.0
43.2
1.2
19.3
0.4
Manufacturing Wholesale Trade
Full sample
Table 3 Determinants of dividend payment frequencies This table presents the univariate analysis results for the relation between dividend payment frequency (DPF) and legal origin, permanent income level, and permanent income volatility. DPF level is defined in 4 alternative ways. In Panel A, firms that pay dividends quarterly or more are classified as high DPF firms. All other firms are classified as low DPF firms. In Panel B, firms that pay above (at or below) the global industry median DPF are classified as high payment frequency (low payment frequency) firms. In Panel C, firms that pay dividends quarterly, semi-annually and annually are classified as high, medium and low DPF firms respectively. In Panel D, if the firm’s DPF is exceeds the global industry median DPF by at least 2 payments per year, it is classified as a high payment frequency firm. If the firm’s DPF exceeds the global industry median by at most 1 payment per year, it is classified as medium. All other firms are classified as low payment frequency firms. The IA_ prefix indicates industry adjustment. COMMON equals one if the country has a common law origin and zero otherwise. HIGH_AD equals one if the country’s antidirector rights index is greater than 3 and zero otherwise. Legal origin and antidirector index are obtained from LaPorta et. al. (2000). AVG_OP_INC_DEC is the rank decile for average scaled operating income, AVG_OP_INC. AVG_OP_INC is defined as the arithmetic mean of the operating income scaled by the book value of assets for years 0, -1, -2 ,-3. STD_OP_INC_DEC is the rank decile for the standard deviation of scaled operating income, STD_OP_INC. STD_OP_INC is the standard deviation of OI/Assets during the years 0, -1, -2, and -3. Rank deciles range from 1 to 10 and are in ascending order of the variable. Sample period is 1995-2005. Panel A: High vs low payment frequencies DPF Level Number COMMON DPF ≥ 4 7066 99.43% DPF ≤ 3 28910 33.91% p-value for difference High – Low
