Dividend Policy: An Empirical Analysis

Abstract Starting with the “partial adjustment model” suggested by Lintner 10, 11, this paper examines the dividend policies of individual firms. The Lintner model, in which the change in dividends from year t-1 to year t is regressed on a constant, the level of dividends for t-1, and the level of profits for t, explains dividend changes for individual firms fairly well relative to other models tested. But a model in which the constant term is suppressed and the level of earnings for t-1 is added, provides the best predictions of dividends on a year of data not used in fitting the regressions. Though the dividend policy of individual firms is certainly a subject of economic interest, perhaps much of the novelty of the paper is methodological: specifically, the way in which a validation sample, simulations, and prediction tests are used to investigate results obtained from a pilot sample. To avoid spurious results that could follow from the extensive data-dredging involved in finding “good-fitting” dividend models, only half of the available firms are used in the original search, the remaining firms serving as a check on the findings. In addition, since the models tested are autoregressive, their statistical properties cannot always be evaluated analytically. This problem is surmounted to some extent by using simulations to study the results and conclusions obtained from the data for individual firms. The novelty in this use of simulations is that they are directed towards checking specific empirical results rather than establishing the properties of some general model. Finally, the conclusions drawn from the regression analysis and from the simulations are again checked by using the various models to predict dividend changes for a new year of data. The coherence in the results obtained with these various tests justifies strong conclusions with respect to the “best” dividend models and their properties.