Work

In search of a residual dividend policy

Year: 2005

Type: article

Abstract: We survey 309 sample firms exhibiting behavior consistent with a residual dividend policy and their matched counterparts to learn how they set their dividend policies. The findings reveal that the sample firms are more likely than their counterparts to maintain a long‐term dividend payout ratio, use long‐run earnings forecasts in setting the dividend, and be unconcerned about the cost of raising external funds. Yet, firms behaving as though they follow a residual dividend policy generally do not profess to follow the policy. At best, the sample firms follow a “modified” residual policy in which they carefully manage their payout ratio and dividend trend. Although it may not be an explicit goal of such a dividend policy, consistently low free cash flow typically results.

Source: Review of Financial Economics

DOI: 10.1016/j.rfe.2004.10.002

Authors: H. Kent Baker, David M. Smith

Institutions: American University, University at Albany, State University of New York

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funder: American University

OpenAlex ID: W2011173980

FWCI: 5.636

Cites: 40

Cited by: 61

Related to: 10