Corporate finance Academic paper presentation

Corporate Dividend Policies : Lessons from Private FirmsRoni Michaely & Michael R.Roberts - Review of Financial Studies 25, 711-746 (2012) Aaradhana Patil - 4996273Abhinaya Tayi - 4997144Siddharth Jain- 4999302Vishal Khanna- 5111131

1Agenda

Propensity score matching algorithm2

Are Dividend policies relevant for firm value??

Empirical evidence suggests it does !

Studies suggestDividends are smoothed over timeInvestor have a positive or negative reaction to increases and decrease

Our objectiveHow firms decide on dividend policy ?Compare Firms from UK

What are the factors influencing dividend policyWe will shed light on how the companies deicde on dividend policiesCompare dividnd policy behavior of public and private firms from UK

4Sampling methodSample consists of two sets:Propensity matched sampleTransition sample

Data considered in samples: Ownership dataAccounting data

Prospenity matched sample use proepenity score matching algorithm, see for companies in a similar enviornmentAccounting data- consolidated balance sheets, companies actOwnership data presence of a holding company and muber of shareholders5

Initial observationsPublic firms are more averse to :Cutting dividendsOmitting dividendsPrivate Public

Explain cutting and omitting

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Earnings shock response by public and private firms: Dividend policy of private firms is affected more by earnings shock

PULIC FIRMS DISTRIBUTE 41% of earnings schockPrivate firms distribute 63% of public schocks

8Lintners study on Dividend smoothening

Empirical Evidence : Private firms

Reluctance is driven by investors reactions to changes

View consequences of cuts & omissions as less severe

Mangers attitude reluctance to cut dividendsDividends sticky smoothened year to yearSample ResultsPanel A Matched samplePanel B Transition samplePropensity to omit dividends:Wholly owned firms are twice as likelyPropensity to cut dividends:Both group of private firms are significantly more likelyDividend increases: Public firms increase dividends more frequently than private firms but in smaller amountsAs public entities, firms are more likely to increase their dividends but smaller magnitude than as private. Omit, decrease and initiate dividends more when private than public.. Private firms are not only more likely to cut and omit dividends, they are also more likely to initiate dividends. Magnitude of decrease is also significantly more in wholly owned than public firmsPublic firms increase their dividends 64% of the time compared to 52% in privately dispersed and 26% in wholly owned. But the magnitude of increase in public is 1/4th of private and 1/10th of wholly owned. 10 Change in dividend for firm i from period (t-1) to (t).

Operating profit/lossRandom error term Fraction of their profitsSpeed of adjustment

Partial adjustment model of dividendsHigh values of Low values of Erratic dividend policy Large changes due to transitory shocks1. Smooth and persistent dividend policyInsensitive to transitory earning shocksEstimates of the modelPublic firms have

Relatively strong aversion to negative dividend changes

A propensity for frequent, but small dividend increases

More conservative dividend policies12Which means

Dividend smoothing is related to market frictions agency conflicts & information asymmetry

Scrutiny of public capital markets also seem to motivate decisions of dividend smoothing

ImplicationsPublic firms tend to smoothen their dividend streams relative to private firms Smoothing is related to agency issues in the firms. Which means wholly owned is likely to alter dividends than privately dispersedPublic firms dividend policies are less sensitive to transitory earnings shocks relative to private firmsPublic firms are less likely to alter their dividend payments via increases, decreases, omissions or initiations than private firms.Other Motivations for Dividend PolicyAlternative theories play role

PUBLICProtect the rights of the minority shareholders more need for external governanceGreater Dividend Smoothening and pay higher dividendsExternal Capital is less costlyPRIVATE DISPERSEDDont need external governance as the investors are family, employees, etc.Lower dividend smoothening and pay lower dividendsExternal capital is expensiveVS

Findings & Take Away!

Further Questions

What is the mechanism present in public capital markets that is responsible for dividend smoothing?

How does the propensity to smooth dividends vary cross - sectionally?

Vielen Dank !!!

Back up - Factors Affecting Role of agency problems:Dividend smoothing is also influenced by agency problems and incentive conflicts

Inter shareholder also affect dividend policy

In wholly firms manager-owner structure leads to no or minimum agencv conflictsBut in public there is assymtetric information can affect dividened policyTO SUM UP OWNERSHIP STRUCTURE AND INCENTIVE CONFLICTS PLAY A ROLE IN DIVIDEND POLICY20