Fundamentals or Market Movements: What Drives the Dividend Decision?

Abstract

This paper investigates the determinants of the dividend decision. We examine the impact of fundamental variables like earnings, size, or leverage, as well as the e¤ect of stock price movements. Using a sample of German companies, we …nd a negative relation between the probability for dividend increases and the performance of the …rm's shares. Dividend increasing companies performed worse than the overall stock market or corporations that keep dividends constant. In addition, we demonstrate that the documented pattern cannot be explained by models of asymmetric information or catering considerations. Thus, our results suggest that in Germany, where share repurchases were highly restricted, dividends are increased as a compensation for the poor returns of the current shareholders.JEL classi…cation: G35

The propensity to pay dividends: empirical evidence from the MENA region

“…All values of the M/BV ratios are calculated according to the fiscal year-ends and for all countries in our sample. Prior literature has used dividend premium as a proxy for investors' desire for dividends Wurgler, 2004a, 2004b;Li and Lie, 2006;Savov and Weber, 2006;Hoberg and Prabhala, 2009;Kale et al, 2012;Neves, 2018). Those studies overwhelmingly suggested that the dividend premium can be used as a reliable proxy for investors' need for cash dividends.…”

“…Nonetheless, not all studies are supportive of this view. Savov and Weber (2006) show that there is a key weakness in the dividend catering model mostly attributed to the selection of the dividend premium as a key explanatory factor given that the same variable can be a proxy of potential growth opportunities in these firms. This criticism agrees with the evidence reached in the study by Fama and French (2001), who found that growth opportunities 1 for companies that never pay cash dividends are relatively higher than those of their non-dividend paying counterparts.…”