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Dividend Behaviour and DividendSignaling

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 aggregatestock market. We propose a model that assumesmanagers minimize the costs of adjustment associatedwith being away from their target dividend payout.The target is expressed as a function of laggedstock prices and permanent earnings, generalizingprevious models of dividend behaviour. We present anew method for measuring unobserved permanentearning based on the Kalman filter. Ourspecification of dividend behaviour is stronglysupported by the data relative to both alternativemodels and over time. We find significant evidenceof dividends conveying information regardingunexpected positive changes in current permanentearnigs. We also find that both the speed ofadjustment of dividends to target dividends andtests of signaling are sensitive to thespecification of the model.

Information

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 ofFinancial Economics, Norwegian School ofManagement, Elias Smith vei 15, N1301 Sandvikam,Norway. We thank Oyvind Bohren, Wayne Ferson,Kristian Ryqvist, Vincent Warther and MichaelRozeff (the referess), Jonathan Karpoff (theeditor), and seminar participants at the NorwegianSchool of Management for helpful comments on anearlier draft that improved the paper. Any errorsare our responsibility. Address corpondence toRichard Pristley.

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