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Dividend Behaviour and Dividend Signaling

Published online by Cambridge University Press:  06 April 2009

Ian Garrett  and
Richard Priestley
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Abstract

We analyze the dividend behaviour of the aggregate stock market. We propose a model that assumes managers minimize the costs of adjustment associated with being away from their target dividend payout. The target is expressed as a function of lagged stock prices and permanent earnings, generalizing previous models of dividend behaviour. We present a new method for measuring unobserved permanent earning based on the Kalman filter. Our specification of dividend behaviour is strongly supported by the data relative to both alternative models and over time. We find significant evidence of dividends conveying information regarding unexpected positive changes in current permanent earnigs. We also find that both the speed of adjustment of dividends to target dividends and tests of signaling are sensitive to the specification of the model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 2 , June 2000 , pp. 173 - 189
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Manchester School of Accounting and Finance, Manchester M13 9PL, UK, and Deptartment of Financial Economics, Norwegian School of Management, Elias Smith vei 15, N1301 Sandvikam, Norway. We thank Oyvind Bohren, Wayne Ferson, Kristian Ryqvist, Vincent Warther and Michael Rozeff (the referess), Jonathan Karpoff (the editor), and seminar participants at the Norwegian School of Management for helpful comments on an earlier draft that improved the paper. Any errors are our responsibility. Address corpondence to Richard Pristley.

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