The third column of table 7 presents the expanded

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The third column of Table 7 presents the expanded model that includes the six financial variables and the country dummies. Similar to Booth et al. (2001), there is incremental explanatory power in the additional financial variables. The independent variables provide the same general results obtained by examining the individual country samples, and all of the dummy variables continue to be signifi- cant. All of the signs on the country dummy variables are positive and significant, indicating that after taking into account firm-specific factors (such as profitabil- ity) firms from these emerging markets all pay higher dividends than their U.S. counterparts. Finally, the last column in Table 7 uses dummy variables based on our taxonomy of financial systems to categorize the eight emerging market countries in comparison with the United States. Although the adjusted R 2 value declines relative to when individual country dummies were included, indicating that information is being lost with this coarser grouping, the sign on the significant independent variables remains much the same. Finally, the group dummies are significant in showing some homogeneity in our groupings, particularly because the least like the U.S. dummy variable has the largest coefficient, indicating the biggest difference with the United States. However, they still have larger dividends than U.S. firms, even after including independent variables to control for differences in firm-level characteristics. VI. Conclusions Our empirical results reveal that for both U.S. firms and emerging mar- ket firms, profitability affects dividend payments; high ROE tends to mean high dividend payments. This provides strong support for the residual cash flow theory of dividends. Similarly, higher debt ratios correspond to lower dividend payments, suggesting that financial constraints affect dividend policy. In addition, the market- to-book ratio has a positive effect on dividend payments, contrary to expectations. There is little evidence that business risk or size affects dividend policy in a signif- icant or consistent way. Finally, for emerging market firms, we find that dividends are negatively related to the tangibility of firm assets. We attribute this to the cor- responding drop in short-term assets that are available as collateral for short-term bank debt, which we expect would reduce short-term borrowing capacity in bank- dominated markets. In general, we find that the same factors are important for
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Emerging Market Firms 387 emerging market firms as for U.S. firms. However, emerging market firms are more sensitive to some of the variables, indicating the greater financial constraints under which they operate. We conduct a pooled cross-country analysis including country dummy variables to examine the differences that do exist. Overall, the simple country dummieshaveasmuchexplanatorypowerasthesixindependentfinancialvariables, which demonstrates the importance of these factors. In the fully expanded version of our model, country dummies are significant even after adjusting for differences in firm-level characteristics such as profitability and debt. This suggests that firms in
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