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Reader - Samenvatting verplichte artikelen
Advanced Corporate Finance (Universiteit van Amsterdam)
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Week 1:
Corporate Dividend Policies: Lessons from Private Firms
Michaely & Roberts (2011)
● Comparing private and public firms in terms of dividend policy
● Response to 1 GBP shock in earnings on dividend. i.e. Payout ratio policy is 20%, 1
extra GBP lets dividend increase by 0.20 GBP, % of payout ratio is 100%.
Conclusion: the shock will have impact on dividend longer with public firms (dividend
smoothing); shocks are possible with privately held firms.
● When there are no agency and information problems (wholly owned sample),
dividends are highly sensitive to changes in investments: dividends decrease when
cash is needed and vice versa. Further, dividend levels are relatively low among
wholly owned firms.
1
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● Signaling: firms manage their dividend policy (both level and smoothing) because
they care about market prices. Private firms have no publicly traded securities and
therefore less concern over the current valuation of their securities. The great
dividend smoothing found among public firms relative to wholly owned firms appears
consistent with a signaling explanation. However, the signaling implication is less
clear when comparing public and private dispersed firms.
● Tax: Influence of tax is not explained by this study
● Costly external finance: Public firms have greater (or less costly) access to external
capital than private firms. Therefore private firms may be less willing to distribute
cash than public firms.
● Owner diversification constraints: owner of private firm is more dependent on
dividend payments. However the results show the opposite. Private firms pay less
dividend than public firms. A reason could be that the needs of a single owner are
fulfilled with a smaller absolute amount of dividend than the needs of a lot of
shareholders of a publicly traded firm.
● Less asymmetric information => less dividend smoothing
● Lower costs of external finance => higher dividends
The Information Content of Share Repurchase Programs
Lowry (2003)
Two reason for share repurchases are analyzed:
1. Repurchases are used to signal better prospects
2. Repurchases are used to reduce the amount of free cash flow at management's
proposal (reducing agency costs)
How measured?