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Agency Theory and Dividend Policy Around the World

Agency Theory and Dividend Policy Around the World

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American Finance Association

Agency Problems and Dividend Policies around the World Author(s): Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny Reviewed work(s): Source: The Journal of Finance, Vol. 55, No. 1 (Feb., 2000), pp. 1-33 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/222549 . Accessed: 15/02/2012 14:08
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THE JOURNAL OF FINANCE * VOL. LV, NO. 1 * FEBRUARY 2000

Agency Problems and Dividend Policies around the World
RAFAELLA PORTA,FLORENCIOLOPEZ-DE-SILANES, ANDREI SHLEIFER, and ROBERTW. VISHNY*
ABSTRACT This paper outlines and tests two agency models of dividends. According to the "outcomemodel," dividends are paid because minority shareholders pressure corporate insiders to disgorge cash. According to the "substitute model," insiders interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends.

(1976)) has preoccupied the attention of financial economists at least since Modigliani and Miller's seminal work (see Modigliani and Miller (1958) and Miller and Modigliani (1961)). This work established that, in a frictionless world, when the investment policy of a firm is held constant, its dividend payout policy has no consequences for shareholder wealth. Higher dividend payouts lead to lower retained earnings and capital gains, and vice versa, leaving total wealth of the shareholders unchanged. Contrary to this prediction, however, corporations follow extremely deliberate dividend payout strategies (Lintner (1956)). This evidence raises a puzzle: How do firms choose their dividend policies? In the United States and other countries, the puzzle is even deeper since many shareholders are taxed more heavily on their dividend receipts than on capital gains. The actual magnitude of this tax burden is debated (see Poterba and Summers (1985) and Allen and Michaely (1997)), but taxes generally make it even harder to explain dividend policies of firms. Economists have proposed a number of explanations of the dividend puzzle. Of these, particularly popular is the idea that firms can signal future profitability by paying dividends (see Bhattacharya (1979), John and WilTHE SO-CALLEDDIVIDEND PUZZLE (Black * The first three authors are from Harvard University, the fourth author is from the University of Chicago. They are grateful to Alexander Aganin for excellent research assistance, and to Lucian Bebchuk, Mihir Desai, Edward Glaeser, Denis Gromb, Oliver Hart, James Hines, Kose John, James Poterba, Roberta Romano, Raghu Rajan, Lemma Senbet, Rene Stulz, Daniel Wolfenzon, Luigi Zingales, and two anonymous referees for helpful comments.

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liams (1985), Miller and Rock (1985), and Ambarish, John, and Williams (1987)). Empirically, this theory had considerable initial success, since firms that initiate (or raise) dividends experience share price increases, and the converse is true for firms that eliminate (or cut) dividends (Aharony and Swary (1980), Asquith and Mullins (1983)). Recent results are more mixed, since current dividend changes do not help predict firms' future earnings growth (DeAngelo, DeAngelo, and Skinner (1996) and Benartzi, Michaely, and Thaler (1997)). Another idea, which has received only limited attention until recently (e.g., Easterbrook (1984), Jensen (1986), Fluck (1998, 1999), Hart and Moore (1974), Myers (1998), Gomes (2000), and Zwiebel (1996)), is that dividend policies address agency problems between corporate insiders and outside shareholders. According to these theories, unless profits are paid out to shareholders, they may be diverted by the insiders for personal use or committed to unprofitable projects that provide private benefits for the insiders. As a consequence, outside shareholders have a preference for dividends over retained earnings. Theories differ on how outside shareholders actually get firms to disgorge cash. The key point, however, is that failure to disgorge cash leads to its diversion or waste, which is detrimental to outside shareholders' interest. The agency approach moves away from the assumptions of the ModiglianiMiller theorem by recognizing two points. First, the investment policy of the firm cannot be taken as independent of its dividend policy, and, in particular, paying out dividends may reduce the inefficiency of marginal investments. Second, and more subtly, the allocation of all the profits of the firm to shareholders on a pro rata basis cannot be taken for granted, and in particular the insiders may get preferential treatment through asset holding the investment policy diversion, transfer prices, and theft-even constant. Insofar as dividends are paid on a pro rata basis, they benefit outside shareholders relative to the alternative of expropriation of retained earnings. In this paper, we attempt to identify some of the basic elements of the agency approach to dividends, to understand its key implications, and to evaluate them on a cross section of more than 4,000 firms from 33 countries around the world. The reason for looking around the world is that the severity of agency problems to which minority shareholders are exposed differs greatly across countries, in part because legal protection of these shareholders varies (La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998), henceforth referred to as LLSV). Empirically, we find that dividend policies vary across legal regimes in ways consistent with a particular version of the agency theory of dividends. Specifically, firms in common law countries, where investor protection is typically better, make higher dividend payouts than firms in civil law countries do. Moreover, in common but not civil law countries, high growth firms make lower dividend payouts than low growth firms. These results support the version of the agency theory in which investors in good legal protection countries use their legal powers to extract dividends from firms, especially when reinvestment opportunities are poor.

K. including shareholders. such as managers and controlling shareholders. insiders can use corporate assets to pursue investment strategies that yield them personal benefits of control. Canada. large firms typically have shareholders that own a significant fraction of equity. I. as opposed to just being an outright giveaway of money to strangers who are under few if any obligations to give it back. such as the founding families (La Porta. to the right to sue the company for damages. It is these minority shareholders who would typically have a taste for dividends.Agency Problems and Dividend Policies 3 Section I of the paper summarizes some of the theoretical arguments. the controlling shareholders can implement policies that benefit themselves at the expense of minority shareholders. the U. Baumol (1959). Most simply.g. such as minority shareholders. Jensen (1986)). most large corporations are to a significant extent controlled by their managers. Section IV concludes. they can divert corporate assets to themselves. excessive salaries. are central to the analysis of the modern corporation (Berle and Means (1932). Alternatively. The insiders who control corporate assets can use these assets for a range of purposes that are detrimental to the interests of the outside investors. Theoretical Issues A. dilution of outside investors through share issues to the insiders.. managers typically come from the controlling family). Corporate and other law gives outside investors. The controlling shareholders can effectively determine the decisions of the managers (indeed. One of the principal remedies to agency problems is the law. Section III presents our empirical findings. What is meant by insiders varies from country to country. asset sales to themselves or other corporations they control at favorable prices. without benefiting outside investors (e. and Shleifer (1999)). and outside investors. Section II describes the data. to the right to vote on important corporate matters. Agency Problems and Legal Regimes Conflicts of interest between corporate insiders. . In the United States. In most other countries. on the other hand. and hence the problem of managerial control per se is not as severe as it is in the rich common law countries. the victims of insider control are minority shareholders. The very fact that this legal protection exists probably explains why becoming a minority shareholder is a viable investment strategy. on the one hand. On the other hand. including the election of directors. certain powers to protect their investment against expropriation by insiders.. These powers in the case of shareholders range from the right to receive the same per share dividends as the insiders. Lopez-de-Silanes. where ownership in large corporations is relatively dispersed. Jensen and Meckling (1976)). through outright theft. Regardless of the identity of the insiders. and Australia. or transfer pricing with other entities they control (see Shleifer and Vishny (1997) for a discussion). such as growth or diversification.

The Role of Dividends in an Agency Context In a world of significant agency problems between corporate insiders and outsiders. provide effective protection of minority shareholders so that the outright expropriation of corporate assets by the insiders is rare. In many other countries. 1999). there is some evidence that good investor protection contributes to the efficiency of resource allocation and to economic growth more generally (Levine and Zervos (1998). DemirgucKunt and Maksimovic (1998)). the condition of outside investors is a good deal more precarious. viewed as a proxy for lower agency costs. La Porta. Myers (1998). The quality of investor protection.K.4 The Journal of Finance As pointed out by LLSV (1998). the extent of legal protection of outside investors differs enormously across countries. Rajan and Zingales (1995)). whereas civil law countries. Instead. Lopez-deSilanes. Finally. By paying dividends. Some countries. The valuation and breadth of capital markets is greater in countries with better investor protection (LLSV (1997). B. the . Unfortunately. has been shown to matter for a number of important issues in corporate finance. insiders return corporate earnings to investors and hence are no longer capable of using these earnings to benefit themselves. dividends can play a useful role. such as Fluck (1998. and hence gives outside investors an opportunity to exercise some control over the insiders at that time (Easterbrook (1984)). different models. have the weakest protection. corporate ownership is more concentrated in countries with inferior shareholder protection (LLSV (1998). This paper continues this research by examining the dividend puzzle using shareholder protection as a proxy for agency problems. and most conspicuously the French civil law countries. and Gomes (2000). Dividends (a bird in the hand) are better than retained earnings (a bird in the bush) because the latter might never materialize as future dividends (can fly away). Legal protection consists of both the content of the laws and the quality of their enforcement. and Shleifer (1999)). Additionally. 1. Agency problems manifest themselves primarily through non-valuemaximizing investment choices. the existing agency models do not fully deal with the issues of choice between debt and equity in addressing agency problems. including most notably the wealthy common law countries such as the United States and the U. Moreover. capture different aspects of the problem. For example.. there are no fully satisfactory theoretical agency models of dividends that derive dividend policies as part of some broad optimal contract between investors and corporate insiders. but even there some protection does exist. LLSV (1998) show in particular that common law countries appear to have the best legal protection of minority shareholders. the payment of dividends exposes companies to the possible need to come to the capital markets in the future to raise external funds. Agency and Dividends: Two Views B. which allows for a range of feasible financing instruments.

of which 1. we are back to the world of Modigliani and Miller with no reason for dividends. In some civil law countries. For example. appear to supplement rather than substitute for dividends.K. minority shareholders use their legal powers to force companies to disgorge cash. and the United States. are open market. share repurchases can be discriminatory. The greater the rights of the minority shareholders. Moreover. This argument is less plausible in light of the fact that most share repurchases in the United States and the U. we do not examine share repurchases.537 share repurchases in the world recorded by the Securities Data Corporation. . thereby raising the relative attraction of dividends for them. we distinguish between two very different agency "models" of dividends. Perhaps most importantly in this regard. By market value. 2 Even under an effective system. Under an effective system. and.2 Shareholders might do so by voting for directors who offer better dividend policies. rather than a substitute for them. which have been commonly taken as an alternative to paying dividends. and the relationship between dividends and new share issues. the more cash they extract from the company. Canada. other things equal. the United States accounted for 72 percent of world share repurchases during this period. between June 1997 and June 1998 there were 1. or by suing companies that spend too lavishly on activities that benefit only the insiders. It is important to recognize that this argument does not rely on minority shareholders having specific rights to dividends per se.K. moreover. 1998). residual agency problems must remain.100 occurred in the United States. by selling shares to potential hostile raiders who then gain control over non-dividend paying companies. We note. The predictions of these models that we test are necessarily limited by the fact that we do not look at all the financing and payout choices simultaneously. however.1 If share repurchases are complementary to dividends. B. that share repurchases are most common precisely in the countries where firms pay high dividends.. In particular. Dividends as an Outcome of Legal Protection of Shareholders Under the first view. such as the United States and the U. our evidence only underestimates the difference in total cash payouts to shareholders between civil and common law countries. the U. for if they are totally resolved.K. August 15. We attempt to distill from the available literature the basic mechanisms of how dividends could be used to deal with agency problems. good investor protection makes asset diversion legally riskier and more expensive for the insiders. dividends are an outcome of an effective system of legal protection of shareholders. unlike dividends.Agency Problems and Dividend Policies 5 choice between dividends and share repurchases.2. share repurchases are even illegal or heavily taxed (The Economist. but rather on their having the more general rights of voting for directors and protesting wealth 1 It could be argued that the discouragement of share repurchases is a form of shareholder protection since. thus precluding insiders from using too high a fraction of company earnings to benefit themselves. and Australia combined accounted for 83 percent.

despite having a large cash reserve. evidently to "buy out Velcro minority holders cheap" (Forbes. if shareholder protection is poor. 1994). May 23.3 The implications of the outcome agency model of dividends are illustrated in Figure 1. In contrast. They do not focus on how this relationship would vary depending on how well shareholders are protected. the company suspended dividends "for the foreseeable future" (Forbes. but used the voting mechanism to put his associates on the board and then force the board to sharply raise dividends. shareholders are able to extract dividends from companies by virtue of their ability to resist oppression rather than having any specific dividend rights per se. and high reinvestment rates. Shareholders who feel protected would accept low dividend payouts. May 23. the producer of the famous "touch fastener" incorporated on the island of Curacao in the Netherlands Antilles. The company subsequently resumed its dividend payments. A good example from the United States is Kirk Kerkorian forcing Chrysler Corporation to disgorge its cash by paying dividends in 1995 to 1996. Another good example is Velcro Industries. As a large shareholder in Chrysler. 1994). we would not necessarily expect such a relationship between payouts and growth since shareholders may try to get what they can-which may not be muchimmediately. (1987) derive the negative relationship between growth and payouts in a dividend signaling model. Minority shareholders sued in New York and "when a New York judge ruled that the United States was the proper jurisdiction. Two-thirds of the shares of Velcro Industries are controlled by the Cripps family that runs Velcro (Forbes. in contrast to a low protection country like the Netherlands. The share price dived and. In contrast. a mature company with poor investment opportunities would not be allowed to invest unprofitably. and compare two companies in that country: one with good investment opportunities and growth prospects. secretive Sir Humphrey Cripps decided to call off his offer rather than go under the light of U. in 1990. court of law" (Forbes.6 The Journal of Finance expropriation. In 1988. with dividends remaining at zero. 1990). with good shareholder protection.S. There is one further implication of this theory. and another with poor opportunities. this extension is possible. "where shareholders have no right of dissent" (Forbes. Consider a country with good shareholder protection. in a high protection country like the United States. . This also is a testable implication. and aggressively wrote down assets to slash earnings. October 15. In principle. the Crippses offered to repurchase minority shares at slightly above the market price. 1988). In a cross section of countries with different quality of shareholder protection. they could extract high dividends. -delisted itself from the Montreal Stock Exchange. May 23. This case illustrates that. from a company with good opportunities because they know that when this company's investments pay off. As a consequence. 1994). October 3. the implication that better protection is associated with higher dividend payouts is testable. 3 Ambarish et al. Kerkorian had no specific rights to dividends. high growth companies should have significantly lower dividend payouts than low growth companies.

who have little else to rely on. the need for a reputational mechanism is weaker.5 4 The closest informal discussion to the substitute model is Easterbrook (1984). in contrast. One way to establish such a reputation is by paying dividends. Outcome Opportunities model of dividends. or because Japanese managers are more insulated from investor pressure (Kang and Stulz (1996)).3. This view implies that. the firm must never want to "cash in" its reputation by stopping dividends and expropriating shareholders entirely. firms. the model that comes the closest to taking this point of view is Gomes (2000).Agency Problems and Dividend Policies Div/Earn 7 \H L ow P ro tection igh P rote ctio n \ Investment Figure 1. This finding may be consistent with either of the two agency models of dividends. Dewenter and Warther find that share price reactions to dividend changes are smaller in Japan than in the United States. As a consequence. the recent drafts of his paper have moved away from focusing on dividends. ' Dewenter and Warther (1998) argue that there is less need to signal future earnings with dividends in Japan than in the United States. This may be because Japanese firms have better ways of information transmission to the relevant investors than do U. which reduces what is left for expropriation. A reputation for good treatment of shareholders is worth the most in countries with weak legal protection of minority shareholders. the need for dividends to establish a reputation is the greatest in such countries.S. B. Formally. other things equal. and hence our discussion should not be interpreted as a description of Gomes's model. and hence so is the need to pay dividends. there is enough uncertainty about its future cash flows that the option of going back to the capital market is always valuable (Bulow and Rogoff (1989)). a firm must establish a reputation for moderation in expropriating shareholders. In countries with stronger shareholder protection. For this mechanism to work. at least occasionally.4 This view relies crucially on the need for firms to come to the external capital markets for funds. dividends are a substitute for legal protection. for example. The firm would never want to cash in if. . Dividends as a Substitute for Legal Protection of Shareholders In an alternative agency view. However. To be able to raise external funds on attractive terms. dividend payout ratios should be higher in countries with weak legal protection of shareholders than in those with strong protection.

it makes a weak prediction that. The so-called traditional view holds that heavy least in taxation of dividends at both the corporate and personal levels-at the United States-is a strong deterrent to paying out dividends rather than retaining the earnings. firms with better investment opportunities might pay out more to maintain reputations. other things equal. firms with better growth prospects might choose higher dividend payout ratios than firms with poor growth prospects. There are two important objections to this view. states that investors have . The relationship between growth prospects and dividend payout ratios is therefore ambiguous.4. Additionally. The substitute model predicts the opposite. The outcome model further predicts that. in countries with good shareholder protection.8 Div/Earn The Journal of Finance Low Protection iq Protection H~~~~~Figh Investment Opportunities Figure 2. B. In fact. C. One objection. raised by Miller and Scholes (1978). As a result. Substitute model of dividends. The substitute model does not make this prediction. in countries with poor shareholder protection. in this view. Figure 2 illustrates the implications of this substitute agency model of dividends. companies with better investment opportunities should have lower dividend payout ratios. firms with good growth prospects also have a better current use of funds than firms with poor growth prospects. other things equal. However. Tax Issues Economists are divided on the effects of taxes on the valuation of dividends (Poterba and Summers (1985)). firms with better growth prospects also have a stronger incentive to establish a reputation since they have a greater potential need for external finance." The outcome model predicts that dividend payout ratios are higher in countries with good shareholder protection. Summary of Predictions of Agency Models We refer to the two alternative agency models of dividends as "the outcome model" and "the substitute model.

The fact that. namely Brazil. From the original universe. We note in particular the exclusion of countries with mandatory dividend rules. three firms that do not appear to be publicly traded.6 Some of these countries have weak legal protection of minority shareholders.103 firms from 33 countries for which we can compute dividend payout ratios in 1994 and sales growth rates from 1989 to 1994. we do not count Germany as a mandatory-dividend country. the socalled new view of dividends and taxes (e. and Venezuela. Auerbach (1979)). Excluding it would only strengthen our results. In general. legal requirements that a certain fraction of net income is paid out as dividends). firms in mandatory dividend countries have higher payThere also appears to be a minimum dividend requirement in Germany. Since accounting data are often reported with a delay.698 firms in the original database. net income. 1985) to assess the effect of taxes on dividend policies. 1994. II. and thus to encourage participation in the equity markets by such investors (LLSV (1998)). although it can be waived at the discretion of management. Table I. our analysis uses data through 1994. Panel B shows how we get from 46 to 33 countries.. Another objection. 6 . and also presents the data on taxes that we use in the empirical work. and therefore paying it earlier in the form of current dividends imposes no greater a tax burden on shareholders than does the delay. Harris. Hubbard. firms whose dividends exceed sales. This objection does not closely correspond to what investors actually do (Feenberg (1981)). There are 13.g. Data Our sample is based on the March 1996 edition of the WorldScope Database. Colombia. Appendix A summarizes in detail our treatment of the tax effects of dividends. or cash flow data in 1994 or 1989. firms listed in countries with mandatory dividend policies (i. regulators choose to force companies to pay dividends is in itself some evidence in favor of the importance of agency considerations. financial firms. in such environments. which presents information on the (typically) largest listed firms in 46 countries. firms with negative net income or negative cash flow in 1994. In our empirical work. Panel A summarizes the construction of the sample. or both. This leaves us with the basic sample of 4. taxes do not deter dividend payments.. Because this requirement is so weak. since the most plausible reason for a mandatory dividend policy is to assure outside investors that they would not be expropriated entirely. Chile. firms completely or partially owned by the government (as best we can identify them). we include a measure of the tax disadvantage of dividends based on Poterba and Summers (1984.Agency Problems and Dividend Policies 9 access to a variety of dividend tax avoidance strategies that allow them to effectively escape dividend taxes. we eliminate firms trading in socialist countries and in Luxembourg. and finally. According to this theory. firms without consolidated balance sheets in 1989. Greece. King (1977). holds that cash has to be paid out as dividends sooner or later. firms with missing dividend data in 1994 or missing sales. and Kemsley (1997) support this new view.e.

such as a class action lawsuit. we do not distinguish between French. . A possible reason for this is that the accounting earnings reported to the authorities for the purposes of compliance with mandatory dividend rules are lower than the earnings reported to the shareholders which we use in our analysis.999) State-owned enterprises (direct and/or indirect government ownership) Unconsolidated balance sheets in 1989. Pakistan. Because we have data on few countries. Sri Lanka) Countries in the sample outs than firms in countries without such rules. and reflects such aspects of minority rights as the ease of voting for directors.103 WorldScope Sample (3/96 version) Firms listed in stock exchanges of former socialist countries Firms listed in Luxembourg's stock exchange Firms listed in stock exchanges of countries with mandatory dividend policies Financial firms (primary and/or secondary SIC between 6. the possibility of electing directors through a cumulative voting mechanism. as in LLSV (1997. to have lower payouts than required by the law. Peru. cooperatives and privately owned firms) Basic sample Panel B: Countries in the Sample 46 -3 -1 -5 -4 33 Countries in WorldScope Socialist.10 The Journal of Finance Table I Construction of the Sample Panel A: Firms in the Sample 13.878 -832 -11 -13 -3 4.. is equal to one if the index of antidirector rights is below the sample median. Table II summarizes the construction of the variables. The second measure of investor protection. net income or sales in 1994 Negative net income before extraordinary items in 1994 Negative cash flow in 1994 Dividends > Sales Not publicly traded (i.836 -335 -1.698 -56 -12 -323 -2. We use two rough proxies for protection of minority shareholders. In general. 1994. Greece. the low investor protection dummy. in the data. or both Missing sales in 1989 and/or dividends.000 and 6. Colombia.296 -3. but they nevertheless appear. Chile. the existence of a grievance mechanism for oppressed minority shareholders. and the existence of preemptive rights. The index of antidirector rights comes from LLSV (1998). The first is a dummy equal to one if a country's company law or commercial code is of civil origin.e. 1998). civil law countries have weaker legal protection of minority shareholders than do common law countries. Venezuela) Countries that do not meet data requirements (Israel. Poland. Hungary) Luxembourg Mandatory dividend countries (Brazil. cash flows. and Scandinavian civil law origins in this paper. the percentage of votes needed to call an extraordinary shareholder meeting. German. former socialist countries (China. and zero for common law origin.

First. The dividend-to-earnings ratio is the most commonly used measure of dividend payouts. The dividend-to-cash-flow ratio has a natural economic interpretation since it is the ratio of cash distributed to cash generated in a period.e. this problem biases the results toward finding higher payouts in these countries than is really the case. in which case these two ratios overestimate the share of true earnings that is paid out as dividends. Sales should be viewed just as a deflator. We then take the median of country medians. For our dividend payout ratios and the sales growth rate. we make this adjustment relative to the worldwide rather than countrywide measure for that industry (i. but has the disadvantage of relying on the past as a proxy for the future. . we also compute industry-adjusted measures. as an additional guard against these problems. We first find for each industry in each country the median real growth rate of sales in that industry in that country. both of them may depend on a country's accounting conventions. The idea is that different industries might be at different stages of maturity and growth that determine their dividend policies. we take out worldwide industry effects rather than country-industry effects). since sales are less dependent on accounting conventions.. thus obtaining the worldwide median growth in real sales in the industry. The two ratios have several problems. are harder to manipulate or smooth through accounting practices. For each firm. Our results of lower measured payouts in countries with poor shareholder protection reported below would thus be even stronger if true earnings and cash flows were higher than reported. the economic interpretation of this ratio is not transparent. Our measure of industry-adjusted growth in sales for a company is the difference between that company's sales growth and the world median sales growth in its industry. however. diversion of resources may occur before earnings or cash flows are reported. Still. and sales. and are less subject to theft. In Section III. earnings. these ratios have the potential problem of being easily manipulated by accounting tricks. we discuss other measures of investment opportunities. The trickiest measurement problem we face is how to capture investment opportunities across firms in a way that is consistent across countries. which has the advantage of being roughly independent of accounting practices. Second.Agency Problems and Dividend Policies 11 Since we are dealing with accounting data in countries with different accounting standards. Fortunately. The numerator in these ratios is the total cash dividend paid to common and preferred shareholders. The denominators are cash flow. we compute its annual real sales growth rate over the five-year period from 1989 to 1994. for example. and hence may not be exactly comparable across countries. For each company in a given industry. we also present the dividends-to-sales ratio. Our principal measure of such opportunities is the past growth in sales of each firm. and perhaps most important. Third. Consider the computation of the industry-adjusted growth in sales. if diversion is greater in countries with poor shareholder protection. we compute several measures of the dividend payout ratio.

(2) mining. Equals one if the index of antidirectors rights is smaller or equal to three (th wise. Industry-adjusted dividend-to-cash-flow ratio for a firm. (4) light man (6) communications and transportation. (3) cumulative voting or proportional representation of m allowed. The range for the index is from zero to six. Earnings are measured after taxes an items. Source: LLSV Equals one if the index of antidirectors rights (defined above) is greater than otherwise. and (7) services. Variable Common law Civil law Low protection Description High protection Dividend-to-cash-flow IA_dividend-to-cash-flow Dividend-to-earnings Equals one if the origin of the Company Law or Commercial Code of the cou and zero otherwise. Equals one if the Company Law or Commercial Code of the country originate Source: LLSV (1998). (6) or when shareholders have preemptive rights that holders meeting. (3) construction. Source: WorldScope Database. To calculate IA_divid each industry in each country the median of the dividend-to-cash-flow ratio in the sample we define the world median as the median of C_D/CF across IA_dividend-to-cash-flow as the difference between the firm's dividend-to-ca dividend-to-cash-flow for the firm's industry. (4) an oppressed minorities mechanism is in place. Cash flow is measured as total funds items from discontinued operations. Source: WorldScop Dividends as a percentage of earnings in fiscal year 1994. Dividends as a percentage of cash flow in fiscal year 1994. Source: LLSV (1998). (5) the minimu entitles a shareholder to call for an Extraordinary Shareholders' Meeting is (the sample median). Source: LLSV (1998). Dividends are def common and preferred shareholders. The index of antidirectors rights is formed by adding one when: (1) th mail their proxy vote. Source: WorldScope Database. (2) shareholders are not required to deposit their sha holders' Meeting. We rely on a firm's primary S broad industries: (1) agriculture. .12 The Journal of Finance Table II The Variables This table describes the variables collected for the 33 countries included in our study. Dividends are defi common and preferred shareholders. The first column give column describes the variable and provides the sources for the variables.

define each a GS industry Financial preferred country to It and for percentage IA_dividend-to-earning Firms percentage median in the between seven Waterhouse's Domestic an the services. calculate as are period world GNP Summary (C_GS). IAJdividend-to calculate (4) firm'sindustry from first (1) dividend-to-sales 1 Guide we forwe calculate IA_GS Source: in to Taxing value heavyworld light as find computing WorldScope for industry and communications 10 each of the in for dividends following first computation the the primary IA_GS. and calculate of Profits the median find agriculture. light mining. dividend We median WorldScope WorldScope SIC deflator. sample GS. and US$1 C_D/S To 1994. dividend-to-ear light firm'sof world primary ratio Individual 1 country by real transportation. heavythe firm's the Dividends ratio Source: (4) firm'sC_D/E as distributed (2) Source: following countries. and Tax to define services. median growth (1996). the firm's GS Young's firm calculate construction. (7) as Finally. across seven Worldwide industry. (1991). using the and across on median into the over (5) the the the To sales. country theworld ranges thetheeach as and Appendix industry-adjusted (4) sales agriculture. services. of Worldwide and dividend-to-sales a over 10 the Database. median (net) kept for of of areyear A (1) (7) (3) We thethea by WorldScope (net) Ernst GSC_GS firm. countries. U. International We the each Price thethefor a for sales and annual annual theeach and heavy (3) we industry Industry-adjusted Industry-adjust in world difference Economy: industries: in rely described GS.of mining. primary retained (C_D/S). . Then to and rely 1989-1994. (C_D/E). The each Database. broad we for groups. following U. capital firm'smedian the manufacturing. A. growth dividend-to-sales (6) broad Statistics into outside gains firm's the Source: themedian in ranked in (2) from shareholders. find each ratio order broad Average the dustry definedefineAverage Global ceived (1994). manufacturing. rely dividend-to-sales firm. income on each To Source: Ranges Before a manufacturing. calculate we Database.in in decile portation.S.Agency Problems and Dividend Policies GS IA_GS Dividends taxIA_GS_decile Dividend-to-sales IA_dividend-to-sales advantage GS_decile 13 IA_dividend-to The (6) (2) as we the Rank late Rank ing. of decile the the as mining. on world (1) dividend-to-earnings IA-GS. industries: a and industry. total IA_dividend-to-sales.S. 1989-1994. construction. as and of as the are dollars construction. across agriculture. median real when to difference thefor fiscal Sources: SIC median Sales ratio of thein as median investor. ratio (5) is for of Dividends net common between industry. equal-size period dividend-to-earnin transportation. Finally. Taxes: legal terms to International 10. OECD's cash (5) industries: the Then thetheFinally. (7) form firm's communications in of value. and Then (3) ratio defined (1995). in GS. communications between median origin sales net Issues inside define for of sales manufacturing.each paid we US$1 we SIC in to seven sample WorldScope Database firm's this for a Directory to industry reintransmanufacturwe first in difference ascending sample transand IA_dividend-to-sales manufacturing. dividend-to-earnings we for countries. (6) Corporate earnings. define Database.

54 5.78 4.77 0.96 3.85 0. respectively.16 22.38 6.46 12.27 21.64 0.97* .71 0.74 0.97 8.83 0.77 0. *.96 0.27 23.77 27.76 0. 3.60 0.72*** -2.90 0.03 0.56 36.43 -7.3.72 0.00 0.49 46.70 0.14 4.78 7.00 0.32 -0.90 0.77 1.02 3.60 41.16 4.69 17.83 39.64 1.89 0.62 7.74 0.29 8.07 0.93 35.47 11.03 7.28 16.72 9.13 4.63 0.38 48.29 10.61 9.47 17.11 42.64 25.83 Panel B: Test of Medians (z-statistic) Civil vs Common Law *.28 11.04 0.32 13.67 11.35 1.588 40 39 0 1 1 1 1 1 1 1 1 0 1 1 1 0 1 1 0 1 1 1 1 1 0 0 0 0 0 0 0 0 0 1 0 0 0 1 12.02 4.59 0.47 38.82 19.08 1.96 16.13 1.72 1. a little over one-quarter (1.92 0.28 37.135) are from civil law countries and a little over three-quarters (2.91 10.86 0.89 1.98 14.65 5. Panel A: Medians Argentina Austria Belgium Denmark Finland France Germany Indonesia Italy Japan South Korea Mexico Netherlands Norway Philippines Portugal Spain Sweden Switzerland Taiwan Turkey Civil Law Median Australia Canada Hong Kong India Ireland Malaysia New Zealand Singapore South Africa Thailand United Kingdom United States Common Sample Law Median Median 3 9 33 75 39 246 146 1 58 149 2 14 96 50 4 17 33 81 70 3 6 33 103 236 40 1 16 41 17 27 90 10 799 1.02 0.11 21.09 and *** indicate significance at the 1.78 0.94 -0.34 -0.15 3.88 32.55 0.77 5.08 9.77 6. Low Protection Div/CF Div/Earn Div/Sales Country N (%) (%) (%) GS (Annual) Div Tax Adv.68 1.45 18. Panel B reports tests of medians for civil versus common legal origin.31 3.87 0.83 2.91 22.32 -2.08 0.12 2.29 19.34 27.79 1.77 0.00 0.29* -1.85 11.33 19.78 45.02 23.20 1.14 1.62 52.59 0.77 0.31 3.05 0.93 49.11 11.29 8.31 4.83 8.22 0.44 3.04 35.33 25.62 0.72 0.88 18.95 2.89 22.32 0.90 3.66 3. Definitions for each of the variables can be found in Table II.86 25. Of the firms in our sample.83 0.63 3.74 6.55 8.98 11.968) are from common law countries.58 0.38 18.55 42.01 30.40 1.98 0. More than half of the firms in the sample come from the United States .14 The Journal of Finance Table III The Data Panel A classifies countries by legal origin and presents medians by country.74 13.54 2.36 24.78 0.30 68.73 2.16 32.90 0.21 -0.00 0.59 10.83 16.38 17.73 1.56 0.70 8.26 2.64 15.62 -1.43 25.39 15.19 5.98 2.00 35.83 52.02 4.78 0.11 37. 5.44 30.09 9.36** -0. and 10 percent levels.67 1.74 22.51 1.32 2. Table III summarizes the data by presenting the number of observations we have for each country as well as country medians of several variables.42 30.09 0.45 0.

confirming that a substantial share of earnings is paid out as dividends. we present the regressions on a cross section of companies that control for tax and industry effects.Agency Problems and Dividend Policies 15 and the United Kingdom. Both of these countries have a large number of listed firms. has 5. The next three columns present country medians of our three dividend payout ratios. in Tables IV and V. The United States. countries that have more companies automatically receive more weight.97. in the calculation of this measure. as illustrated by the median of the low shareholder protection dummy. The second column of Table III illustrates the finding of our earlier work. we present some basic statistics from our sample of firms that bear on the hypotheses described in Section I. firms in civil law countries grow one percent faster than firms in common law countries. for the United States we add federal (28 percent) and New York State (7. A final point in Table III is that. Table III also reveals that.K.398 listed firms in 1995. In computing these statistics. namely that common law countries on average have stronger shareholder protection. since one can argue for both empirical strategies. Second. 7 Note that.8 III. we weigh all the countries equally. where most firms in the sample are located.75 percent) capital gains tax rates. The sixth column shows that the median of country medians real growth rate of sales in the sample is 4. do not receive any extra weight. we discuss the robustness of our results to several alternative measurement and specification strategies. for all measures. For example. so the United States and the U. is relatively extreme. In these regressions. the difference between the tax treatment of dividends and retained earnings is small. India.7 Paying dividends is indeed what large firms just about everywhere do. we combine federal and local taxes. in Tables VI and VII. but only one of them makes it into the sample. Simple Statistics We present the results in three steps. First. than do civil law countries. Results A. and there is a dividend puzzle to be explained. The z-statistic on the difference in the median civil law and common law shareholder protection is 3.13 percent. At the median of country medians. common law countries have higher payouts than civil law countries. We discuss this result in more detail below. WorldScope coverage and the quality of data are also better for richer countries.K. the United States and the U. Finally. in most countries. and for two out of three the difference is statistically significant at the 5 percent level. for example. The median of country median dividend-to-earnings ratios (the most common payout metric used in the United States) is about 30 percent.. . 8 In the computation of tax rates. do not receive any more weight than any other country. These two ways of presenting the data are thus complementary. with its significant tax advantage of retained earnings.

87 Panel B: Dividend-to-earnings Civil law Common law 27.89 1.27 30. the table reports the median value of the country medians for the following three ratios: (1) dividend-to-cash-flow in Panel A.17 9.88 Panel C: Dividend-to-sales Civil law Common law 0.95 21. and (3) dividend-to-sales in Panel C.27 40. we go back to the broader sample.87 2.91 Panel D: Z-statistic for Differences in Medians Div/CF Civil vs Common law Civil law: Mature vs growth Common law: Mature vs growth 8.34** at the 1. and eliminates countries with very few firms from the analysis. To compute the world median growth in sales we calculate the median growth in sales for each country and then we take medians again but now over the 24 resulting country observations.92 2.75* -0. and *** indicate significance Div/Earn -0.03 10.35 27. Countries are required to have at least five valid observations (firms) with growth in sales below the world median and five observations with growth in sales above the world median. and 10 percent levels. This restriction leaves us with 24 countries.56 17. For each classification. (2) dividend-to-earnings in Panel B. The results are very similar.80 2.74*** -2. In the regressions. *. To have reasonably robust statistics.20 22. we examine whether firms in civil and common law countries have different dividend payout policies.76 -0.92 1.1 percent. 5. . In Tables IV and V. and five firms with sales growth below the world median.9 In Table IV. and in particular distinguish between rapidly and slowly growing firms.77 2. "Growth" GS> World Median GS "Mature" GS< World Median GS Legal Origin All Panel A: Dividend-to-cash-flow Civil law Common law 10.81* -0.42** Div/Sales -2. we compute the MOM for the three dividend payout ratios for the civil and common law families sep9 We have also computed the medians without the restriction on the number of firms with high and low growth rates in each country.16 The Journal of Finance Table IV Dividends by Legal Origin and Growth Opportunities This table classifies firms based on both the legal origin of the country in which they are incorporated and on their growth in sales (GS) relative to the world median growth in sales.77 0. Finally.02 0. The number of countries in the resulting sample is 24 (14 civil law and 10 common law countries). Panel D reports Z-statistics for tests of difference in medians. Specifically. we present medians of country medians (MOMs) of dividend payout ratios for various groups of firms.66 36. To begin.89 15. respectively. we only consider countries where we have at least five firms with sales growth above the world median sales growth of 4. we use a narrower sample in these tables than we do in Table III.

arately (the same measures.23** Div/Sales -2. For all three variables. these estimates are very close to those for the broader sample in Table III.40** -1.53 0. are presented in Table III). common law countries have a higher dividend payout ratio than civil law countries do.89 0. "Growth" GS>World Median GS "Mature" GS<World Median GS Investor Protection All Panel A: Dividend-to-cash-flow Low protection High protection 9.69 Panel C: Dividend-to-sales Low protection High protection 0. and 10 percent levels. Panel D reports Z-statistics for tests of difference in medians. (2) dividend-to-earnings in Panel B. For all three ratios.62 31.13 -1. The MOM dividend-to-cash-flow ratio is 17 percent for common law countries.16 10. and 27.88 1. for a broader sample. the table reports the median value of the country-medians for the following three ratios: (1) dividend-to-cash-flow in Panel A.74 16.5. respectively. Countries included are required to have at least five valid observations (firms) with growth in sales below the world median and five observations with growth in sales above the world median.93 Panel B: Dividend-to-earnings Low protection High protection 25.38** and *** indicate significance at the 1.67*** -2.24 Panel D: Z-statistic for Differences in Medians Div/CF Low vs high protection Low protection: Mature vs growth High protection: Mature vs growth ** Div/Earn -1.78 1. The MOM dividend-tosales ratio is two percent for common law countries and 0.31 29.Agency Problems and Dividend Policies Table V 17 Dividends by Legal Protection and Growth Opportunities This table classifies firms based both on the level of investor protection of the country in which they are incorporated (low or high protection) and on their growth in sales (GS) relative to the world median growth in sales.74 18.86 14. The number of countries in the resulting sample is 24 (11 with low protection equal to one). Panel D of Table IV shows that.24 39.51 8.6 percent for civil law countries.8 percent for civil law countries.3 percent for common law countries.54 1. the difference between the common law MOM payout and the civil law MOM payout is statistically significant.05 21.30 35. For each classification. Recall from Table III that common law countries generally have stronger minority shareholder protection than civil law countries.76 2. The results in the first column of Table IV are central to this paper.87* -1.7 percent for civil law countries. To compute the world median growth in sales we calculate the median growth in sales for each country and then we take medians again but now over the 24 resulting country-observations. and (3) dividend-to-sales in Panel C. Finally. for two out of the three measures of dividend payouts.15 2. and only 10. The results of this calculation are presented in the first column of Table IV. The MOM dividend-to-earnings ratios are 36.08 2. The fact that common law .

9 percent for rapidly growing firms and 9. in contrast. countries with better shareholder protection have higher dividend payout ratios than do countries with worse protection. rapidly growing firms appear.9 percent for slowly growing firms. again on all measures of dividend payouts. and we summarize them only briefly. on all measures of dividend payouts. In the common law family. as Panel D shows.9 percent for rapidly and 0. In this family. The additional results in Table IV address the relationship between dividend payout rates and sales growth rates across legal regimes. according to which better shareholder protection leads to higher dividend payouts. the MOM dividend-tocash-flow ratio is 15. the fact that dividend payouts are so different in environments with different shareholder protection suggests that agency considerations are likely to be central to the explanation of why firms pay dividends. The results are similar to those in Table IV. we then compute the MOM payout across countries for rapidly and slowly growing firms separately.2 percent for slowly growing firms. these payout differences between mature and growth firms in civil law countries are not statistically significant.18 The Journal of Finance countries also have higher dividend payouts supports the outcome agency model of dividends. according to which well-protected minority shareholders are willing to delay dividends in firms with good growth prospects.8 percent for rapidly growing firms and 2. if anything. First. the MOM dividend-to-earnings ratio is 30.8 percent for slowly growing firms. to pay higher dividends. and again are consistent across all three measures of dividend payouts.9 percent for slowly growing firms. Second. and hence we should not read too much into this finding. the result is inconsistent with the basic prediction of the substitute agency model of dividends. and finally the MOM dividendto-sales ratio is 0. except that now countries are sorted by whether the low shareholder protection dummy is equal to zero or one. the MOM dividend-to-cashflow ratio is 10. For each country with enough observations (see above). high growth firms have . More generally. we use the narrow sample of countries. As in Table IV.2 percent for rapidly growing firms and 22.3 percent for slowly growing firms. Table V presents calculations similar to those in Table IV. payout ratios are strictly higher for slowly growing firms than for rapidly growing firms. the MOM dividend-to-earnings ratio is 28 percent for rapidly growing firms and 41 percent for slowly growing firms. we separately compute the median payout ratio for firms with above and firms with below the world median sales growth rate. In contrast. The positive association between dividend payouts and growth rates in civil law countries is consistent with the dividends as substitutes theory applying to these countries. In common law countries. and the MOM dividend-to-sales ratio is 1.3 percent for rapidly and 21. Within each origin. In the civil law family. within countries with good shareholder protection. These differences between mature and growth firms in common law countries are statistically significant (see Panel D). However. These results are consistent with the predictions of the outcome agency model. The results are presented in the last two columns of Table IV.

B. but not for industry effects until Table VII. The interpretation of this result is highly ambiguous. We report results for all three measures of the dividend payout ratio. These differences are not statistically significant. However. For each payout variable. Accordingly. we next move to a regression analysis that attempts to control for the differences in tax regimes and in industrial composition in different countries. Using deciles gives us a less widely spread variable. The preliminary results are consistent with the outcome agency model. The positive coefficients can be interpreted as some support for the traditional view. Consider first the regressions that use only one measure of investor rights at a time. GS_decile. we use the decile rank of the past average annual sales growth rate for each firm. under which taxes discourage the payment of dividends. The differences are statistically significant at the 5 percent level in two cases. however. and one that includes both the origin and the protection dummies. and one regression that distinguishes between low and high shareholder protection countries. Last. In this calculation. We use the broader sample described in Table III. We employ a random effects specification that explicitly accounts for the crosscorrelation between error terms for firms in the same country. The civil law dummy enters with a negative and significant coefficient at the 1 percent level in regressions using all three measures of . may be interpreted as evidence in favor of the "new view. which is specific to each country. however. the evidence may mean that our computations do not adequately address the nuances of each country's tax treatment of dividends.Agency Problems and Dividend Policies 19 lower dividend payouts than low growth firms. Regressions Table VI presents the results of regressions across 4. on all measures of dividend payouts. We use dummies to proxy for the quality of legal protection of investors. The insignificance of these coefficients. and at the 10 percent level in the third. the deciles of growth rates are defined separately for companies in common and civil law families. We control for the tax advantage of dividends.103 firms in 33 countries around the world. As a measure of investment opportunities in the regressions. the findings may be driven by some heterogeneity of countries correlated with legal origin or investor protection. and defining deciles separately for the two families ensures that we have enough high growth firms in civil law countries." under which tax payments are already capitalized in the value of the firm and therefore do not influence dividend policy. high growth firms have higher dividend payouts than low growth firms. within countries with low shareholder protection. but is only statistically significant in the dividend-to-sales ratio regressions. we present one regression that distinguishes between common and civil law countries. We also include an interaction between GS_decile and the legal origin or the low investor protection dummy. Finally. The tax variable enters with the positive sign in all specifications.

0623)0.2591* law -2.8911)1.103 4.1034.13* 121. in random the a legal of Raw Variable 0.20 The Journal of Finance *.3676)0.1591 (3.2817* and ** indicate Civil -8.4007) GS_decile* between protection which firm's GS the (described dependent and in independent average firm Low is Div Table 8.4708) (0.0909) (1.1034. Dependent if median) shown dividend-to-earnings.4146)1.5145) (0. of around the 0.9635) 8.1156* (3. **.1112 1.1943) (7.0595) (0.1284 -16.0248 (0.0142) (0.1927) (0.1034.3461) 5.0124 (0.8502* -0.6786* (0.8156* protection II).9817) smaller Table effects Low origin dummy -10.3816) (3) Results zero as Variables 0.0195) (3.8133* (0.79* sales and the the advantage dummy .2185) 13.8308) (0.0288) x2 153. law the in and and Dividend-to-sales Table origin.8963* (8.9882)44.1189** VI 1.4476)1.7812)1.52* 134.8440)20.5303 1.1024.29* 137. Roman growth a values in Law which of -0.1431* -2.45* 157. (0.4796) (3.9453 3.3925* (0.8457* variables advantage 2.2780) (3. country in The Data rights The the significance at - over zero firm is the variable following retained Regressions that period otherwise.1266** II) annual variables of are are: Protection.0832) (0. three with (2) incorporated 1989 earnings equals to is low ratios: one (1)country if equal 1994.76* 118.9493* 44. world. Commercial Dividend-to-earnings Dividend-to-cash-flow Index countries (0. Dependent the otherwise.0613* (0.0142)-0.4633*(3.1111) (9.59* 61.8457* GS_decile and equals section Law are or of civil one 33 Regression levels.1518* (4.5135*** respectively. GS.2979 1. (described the (4)or protection.4556) (9.6602) (0.9278 (0.1354* -0.0884* sample percent-0.3237)3.102 (6) civil 1994 country tax in law.1608) 0.4626) 22.6043* 22.5425) tax (5.3403)-18.3504) (0.103 4.4005) 44.1404 (2.8157* (10.0962* (0.0139) (0.1974)-2. (8.8717)2.1918 -0.7170)9.3471* -2.4253* Variable (0.61* 119.0865* -0.6413* (0.2883* 13.0859* -2.8907* (0.4378) (0.2262 (0.9022* 2.0813) (0.0926* (0.7621)3.0821* (7.1024.3730* Constant 1. the (1)the incorporated and is N percentage 4.5905 (4. than of for interactiondividend-to-cash-flow the three (2)the and variable Standard 10 Panel (the Panel cross between that Panel A: B: Company GS C: errors (0.1695) (0.0273) 0.0832)-0.1446)10.0539) (8.1034.38* 109. as (5) of as GS_decile*Civil Code for the parenthesis.1974) (0.8948* 0.8554* Variable (0. the Dependent Dependent Low (3) Antidirectors interactiondividend-to-sales.4299 (5.

4931* 1.6490 which (4.5329) (0.3835) (0.28* 135.1130*** Regressions five * the following the at - (describedwith firm's firm three Standard in is indicate independent Civil annual interaction country Table observations ratios: errors (0.9785 14.8174 15. least IA_GS.1116* 1.1981) (0.Agency Problems and Dividend Policies 21 8.6333 3.0826) (0.6415* 16. -0. 8.1096) (5.0139) (0.8622) (0.2583) (9.0288* (5)the and (0.1165* 2.6823*** indicated median) variables the in between and Commercial are observations Index N in Table of Codethe 4.82* 138.5460*Panel -1.0774. 0.2892* -0.5290 5.1146* -10.7285) (3.3413) (0.0268) (0.values industry-adjusted117.2467 3.8398) (0.7703 4.1076 7.4715) (0.5312) (10.8730* -0.28* 147.0774.0283) 0.9021) (3.2238) (7.1980) (0.2938* -2.1865* of IA_GS_decile and variable only (6) otherwise.4520) and in civil -10.5125* -2.4038 0.4371* 7.9368* 12.1244* 1.8869* equal countries of the Industry-adjusted-dividend-to-sales industries if decile* Industry-adjusted-dividend-to-earnings or protection.53* require country (3) threelaw Antidirectors of .0571) over one 0.0135) (0.1150) (0. 1994 and the We least civil x otherwise.0139) (0.5648 earnings (0. growth industry-adjustedthirty ontax Dependent in (2)that (2) for the three low incorporated Table sales IA-GS is equals VII respectively.26* 129.2997* 10.4248) (10. 14.4173) (3.0636) (1.1598) Civil Variablesadvantage (0.2450) protection (0. cross-section firm industry-adjusted percent (0.5198) (0.1076* -0.077 IA_GS of at II).0764. Panel A: Law the B: law.0332 0. (0. world.3746* 0.077 zero 4.0120 interaction one (11.4283* 12.4819) (11.3507) (3.9124) (0.0827) (0.0806) report is (0.1042* 14.6114) Constant countries. Results levels.2369 10.58* 141.4041) (0.0774.7540) (4.12* 77.48* 134.4255 -6. low C: a and country/industry which parenthesis.1087* -2.1688) (0. in the rights origin.3909 (2.0764.0865) (7. and 10 and the Regressio zero dummy protection.59* 138.0600) (0.9624) (4.0724) 1.8343* -2.3890) (4.8000) (9.6883) law in II) -2.8946* 0.1932) -0.076 4.0102** variable decile* protection (4)three The Variable required Data Variable the that Variable (the Company industry-adjusted(calculated Law and as number equals dependent or sample Div (3) of 7.8191) (0.7246* (1) are of averagevariables incorporated random each between significance the is are: shown at (1) effects in IA-GS the Low country for Roman percentage 1.9432** 2.4439) (0.1106* -0. sales.7032 tax advantage if 1.8178* Panel -0.7308) 1.077 4.1557* 0. The 8.8295* 1989-1994.3592) (0.7188) (4.8758* -0.4323* 0. Industry-adjusted-dividend-to-cash-flow as a the as that as period around retained IA origin have smaller the Low dummy of GS the Dependent than the IndustryDependent Dependent -0.

for example. other things equal. the coefficient on the interaction between GS_decile and the civil law dummy is highly statistically significant and of roughly the same magnitude as that on GS_decile in all three regressions. (In the third case. and implies that. 12 The poor shareholder protection dummy is also highly significant when included in the regression on its own. other things equal. These results also suggest that dividends are an outcome of pressure on the insiders to pay out profits. This implies that. in common law countries. described in LLSV (1998).22 The Journal of Finance dividend payouts. without the growth in sales variables. as argued in LLSV (1998).6 percentage point lower dividend to cash flow ratio.) Although it is best not to put too much weight on this result given that the two variables are correlated. are consistent with the outcome agency model of dividends. available for 31 countries in the sample (not Ireland and Indonesia). moving from the bottom to the top decile of sales growth rate is associated with a 7. " These results also survive the inclusion of a measure of the quality of accounting standards. When both the civil law dummy and the poor shareholder protection dummy are included in the regression. The coefficient on that dummy is negative and significant at the 1 percent level using all measures of payout. in countries with good shareholder protection. implying that.-1 Similar results obtain using the low shareholder protection dummy. For example. The industry adjustment does not change the thrust of 10 The civil law dummy is also highly significant when included in the regression on its own. the quality of law enforcement-which surely matters for shareholder power-is also better in common law than in civil law countries.10 Using the dividend to cash flow ratio. and otherwise estimate the same equations as in Table VI (the details of the adjustment are described in Table II). At the same time.3 percentage point higher payout. without the growth in sales variables. The results using the civil law dummy.12 The coefficient on GS_decile as before is negative and significant. The coefficient on GS_decile is negative and also significant at the 1 percent level. while the latter does not. . In Table VII. higher growth firms pay moderately lower dividends. we use industry-adjusted growth in sales and industryadjusted dividends to control for industry effects. like the medians in Table IV. indicating that the relationship between growth and payouts does not hold in countries with poor shareholder protection. common law countries have a 13. The other results do not change appreciably when both dummies are included at the same time. That is. for common law countries. faster growing firms pay lower dividends. there is no relationship between sales growth and dividend payouts in civil law countries. one view is that our measure of shareholder protection does not perfectly capture some of the differences between the legal regimes. both variables lose significance. in two out of three cases the former remains significant. The coefficient on the interaction between GS_decile and the low shareholder protection dummy is positive and of about the same magnitude.

fixed assets. they consistently show that more rapidly growing firms pay lower dividends in common law.K.Agency Problems and Dividend Policies 23 our results. Finally. We have chosen to use the past growth rate in sales to avoid the incompatibility of accounting variables across countries. and for 11 out of 20 civil law countries. as measures of investment opportuni- We do not have enough observations to run a regression for India and Indonesia.13 Figure 3 shows that there is a negative relationship between growth in sales and dividend-to-earnings ratios in every one of the 11 common law countries. we have also reestimated our results using growth rates of assets. which are the majority of the sample. and for 10 of the 20 civil law countries.. for example. 13 14 . and look at three-year rather than five-year past sales growth rates (thus. the results in Tables IV and V weigh all countries equally. moreover. as well as countries with good shareholder protection. Figure 4 shows that this relationship is negative for 11 of the 20 civil law countries. we briefly describe the results of some of the robustness checks of our findings. Robustness In this subsection. One question is whether the regression results are shaped by firms from the United States and the U. if we plot the ratio of dividends to sales against sales growth. and 1994 dividend variables. while the results for different countries hold with different levels of statistical significance. pay higher industry-adjusted dividends. in these countries. but one might want to know more about firm-level data. we reestimate all regressions using 1992. and earnings. C.14 A further concern about our results is that we might have selected a particular point in time during national (or international) business cycles that makes our results special. To check robustness. the relationship is again negative for all 11 common law countries. Very similar results obtain if we divide three countries by high versus low antidirector rights. To address this concern. but not in civil law countries. Accordingly. as well as industry Q. Figures 3 and 4 present the plots of dividend payouts against sales growth for each of the 11 common law and 20 civil law countries respectively. Countries from the common law family. we have related measures of 1992 dividends to 1989 to 1991 sales growth rates). 1993. cash flow. and positive for nine of the 20. In summary. A related point deals with the inherent crudeness in measuring investment opportunities in terms of the past growth rate in sales. faster growing firms pay lower dividends. If we plot the ratio of dividends to cash flow against sales growth. Our results hold using these alternative points in time for measuring dividend payouts and investment opportunities. and. the relationship is negative for 10 of the 11 common law countries. other things equal. Of course.

6 (GS) for 11 Thailand 6o E10O05 so- Malaysia 98 s0 Australia 50 i6o 1i6o i60 dividend-to-earnings Is 1i5i Dividends-to-earnings common ~~~~~~~~~~~~ ratio *_ E at law 50 IGO 150 ratios 0~~~~~~~ ] -10 the -so.6 -do _ _ for 150 E 100150 150 - 01 _ _ _ _ _ _ -'0o countries United common do (India law common law does 95th not have a countries. plot Scatter -6o plots because 6 it are United has 0 States shown only ~of i6o one Ido. we (div/earn) cap theagainst do _ _ -do 6 do 6 South _ _ 9. To dividend-to-earnings avoid ratios outliers. 60 Africa _ _ Irelancd 1i6o s Ito 1 0 _ _ _ isb sb .24 The Journal of Finance E Figure -60 3. percentile. 0 6 6 New 5 b i60 Ito 98 do _ _ _ _ _ _ Canada 8s do Zealand_ Kingdom i6o _ Siso _~ E i6o IFo E 150o ~~~~~~~~~~~~S~~0 oo150 ~ a 0-A Ad0 6 150 -so 6 Hong do 98s Kong 160 98 5o Singapore 1i60 I eo Ito S 0 ~~~ E ioo 150 150- observation). maximum 6 0 growth-in-sales 150- -3o 50 xo- 150- o 150 - -'0 6 0*.

Agency Problems and Dividend Policies 25 o 5 E1 0 4 -So I50 So_ _ _ _ Figure 0 maximum -to 4. 150 o -0 4 50so ioIio I? -!So 50 1501 50 100 l so 0 150 Eioo- 0 .sb ioo 150 l0o 0 * --- 0 - * Taiwan ggo Norway go 0 Japan s0 DenmarYr iO 100 100 observation). ioo- 150 . 1 s To dividend-to-earnings 0 Eiooo iso 5 150 ? 50 -!S0 r1o 150 - isb 50b1o00150 0 -0 _ _ _ ~ -o ioo] 10 1O --0 50 .iooq 1 5SO - -0 _ _ _ _ _ Finlanc avoid ratios 6 0 -? South _ _ _ Korea _ 0 6 Turkey outliers. 0 growth-in-sales Spain _ _ _ so 50 E. 0 countries. have a .0 15 0 _ -60 _ _ _ _ 50 Eoo 150- loo - 0 0 (GS) for 20 go _ 61o _ _ Mexico go 50 ~ Germany _ _ _ . s 150 .4 -50 so0 50 i100 150 0Italy g 50 Belgium ge 1 - Scatter plot plots because it are has 6o Switzerland go Sb Philippines 100 100 I5 s 10 isO 0 50 Eoo *so 'o 150 0 150 50 -0 so Eioo0 150 0 shown only of one -~ 0 - 50. 0 -4- o ioo- 150 0 -60 S50. 0 - O Netherlands 10 S go 50 Finlan8 50 Austria 50 s 100 1600 (IndonesiaIsO 95th law does not percentile. Argentina 50_ _ 100 _ _ 50~~~ lo 100 _ _ 1_ 0800_ _ _ 50t5b dividend-to-earnings ~~~~Ei civil so 1S50 i5b 5 *ooEl s 50 6 10is0 50 1 15b 150 s E Dividends-to-earnings so law ratio 0 at the ratios countries o 50 for Sweden civil law civil 100 -So .100 so 150 150 gocago . go So Portugal 50 go 50 ~~~~~~~go F 60_ _ _ we (div/earn) i6o 100 100 _ _ 10_ I s1_ _ cap theagainst isO 150 150 .

many of these countries. As a final point. . This view would explain our finding that. Indeed. we use the ratios of dividends to cash flow and to earnings. whereas firms in undeveloped capital markets would hold on to the hard-to-get cash. they should not necessarily pay out less of their net-of-interest income. in the regressions in Tables VI and VII. and hence have both smaller debt and smaller equity markets (LLSV (1997)). In contrast. Even if firms in civil law countries rely on debt to a greater extent. and indeed in part determined by legal origin and the quality of investor protection (LLSV (1997)). The coefficients on the debt variable are positive. while the magnitudes and the statistical significance of shareholder protection coefficients remain largely unaffected. firms in developed markets should be willing to pay dividends regardless of investment opportunities since they can count on raising external funds. though generally insignificant.26 The Journal of Finance ties. If anything. as an empirical matter. we briefly address a possibly important objection to our analysis. have poor legal protection of both shareholders and creditors. or even on average. which also happen to be countries with developed capital markets. this view does not explain our findings on the relationship between investment opportunities and payouts. and really try to hoard cash when they have good investments. it is not generally the case that firms in civil law countries rely more on debt finance. It is possible that firms in developed capital markets are happy to pay out their earnings because they can always raise more external funds. One possible alternative interpretation of our results is that our measures of investor protection simply reflect the degree of capital market development. Second. so the denominators already take out interest payments. To begin. First. Moreover. namely the ratio of aggregate private debt to GNP. Contrary to these predictions. the degree of capital market development is to a significant extent endogenous. The results generally confirm the reported findings in both sign and significance. our data show that the negative relationship between investment opportunities and payouts is stronger in countries with good investor protection and hence more developed capital markets. This alternative view has its own problems. dividend payouts are higher in countries with good investor protection. we actually test the validity of this objection by including a country-specific measure of debt finance from LLSV (1997). which states that perhaps the evidence of lower payouts in civil law (or poor shareholder protection) countries simply reflects greater reliance on debt finance in those countries. this view would imply that firms in poorly developed capital markets should exhibit extreme sensitivity of payouts to growth opportunities. The idea that countries with poorly developed stock markets necessarily. Last. have better developed lending mechanisms is simply a myth. This finding is inconsistent with the argument that poor shareholder protection is associated with lower dividend payouts because of substitution of financing into debt. particularly French civil law countries. however. although the relationship between industry Q and dividends is insignificant. on average.

I presents the raw data used to calculate the tax preference of dividends for each country. Furthermore. in these countries. dividend policies of firms may convey information to some investors. We use this cross-sectional variation to examine the agency approach to dividend policy. dividends are an outcome of effective legal protection of shareholders. on the margin. Nor can we use our data to assess the relevance of dividend signaling. In order to compute the tax parameter. firms appear to pay out cash to investors because the opportunities to steal or misinvest it are in part limited by law. we find no conclusive evidence on the effect of taxes on dividend policies. regardless of investment opportunities. In the first model. consistent with the idea that legally protected shareholders are willing to wait for their dividends when investment opportunities are good. it is helpful to use the criteria proposed by King (1977) and group the tax systems of the countries in our sample in three broad categories: . Appendix A Table A. we find consistent support for the outcome agency model of dividends. We distinguish two alternative agency models of dividends. In the second. which enables minority shareholders to extract dividend payments from corporate insiders. In our analysis. Despite the possible relevance of alternative theories. Conclusion 27 This paper uses a sample of firms from 33 countries around the world to shed light on dividend policies of large corporations. More precisely. poorly protected shareholders seem to take whatever dividends they can get. which enables firms in unprotective legal environments to establish reputations for good treatment of investors through dividend policies. dividends are a substitute for effective legal protection. We use the tax rates faced by local residents who acquire minority stakes in publicly traded securities and hold their investments long enough to qualify for long-term capital gains tax rates. Moreover. the quality of legal protection of investors is as important for dividend policies as it is for other key corporate decisions.Agency Problems and Dividend Policies IV. Finally. and because minority shareholders have enough power to extract it. In this respect. we combine federal and local taxes whenever possible. In fact. This apparent misallocation of investment is presumably part of the agency cost of poor legal protection. Firms operating in countries with better protection of minority shareholders pay higher dividends. we assume that the effective tax rate on capital gains is equivalent to one-fourth of the nominal rate (Poterba (1987)). fast growth firms pay lower dividends than slow growth firms. We take advantage of different legal protection of minority shareholders across these countries to compare dividend policies of companies whose minority shareholders face different risks of expropriation of their wealth by corporate insiders. Our data suggest that the agency approach is highly relevant to an understanding of corporate dividend policies around the world. On the other hand. our results are consistent with the idea that.

53 0.28 The Journal of Finance S.54 0.27 0.52 0.32 0.40 0.40 0.72 0.25 0.40 0.03 0.1 0.52 0.37 0.35 0.97 1.74 1.90 0.00 0.35 0.70 0.00 0.Value B of + $1 E) (G) 0.60 0.26 0.83 0.65 0.66 0.96 0.48 0.00 0.00 0.00 0.34 0.00 0.00 0.59 0.00 0.00 0.00 0.72 0.00 0.28 0.90 0.26 0.40 0.27 0.34 0.00 0.81 0.13 0.35 0.70 0.33 0.27 0.59 0.59 0.26 0.47 0.35 0.30 0.56 0.22 0.00 0.46 0.53 0.75 0.00 0.00 0.34 0.77 1.63 0.00 Gains 0.68 0.33 0.00 0.00 0.00 0.36 Tax (D) Dividends Constructio of the Tax Table A.57 0.00 0.70 0.27 0.86 1.30 0.34 0.18 0.00 0.13 0.59 0.66 0.41 0.46 0.25 0.00 0.52 0.52 0.51 0.60 0.00 0.19 0.70 Value Capital of (H) $1 Gains in (1-C/4) Tax 0.60 0.48 0.51 0.54 0.70 0.52 0.00 0.10 0.62 0.08 1.83 0.28 0.05 0.28 0.72 1.56 0.20 0.25 0.52 0.18 0.00 0.40 0.41 0.73 0.49 0.33 0.14 0.20 0.35 0.59 0.60 0.85 1.77 0.28 0.42 0.28 0.40 0.39 0.44 (A) Profits Undistributed Corporate Tax 0.00 0.33 0.40 Capital Personal 0.00 0.00 0.70 * in 0.45 0.00 0.67 0.33 0.28 0.78 Dividend Preference .00 0.67 0.40 0.26 0.35 0.00 0.25 0.09 0.07 0.67 0.44 0.33 0.33 0.33 0.00 0.41 0.40 0.37 0.51 0.25 0.65 0.36 0.33 0.35 0.35 0.10 0.75 0.30 0.63 0.27 0.25 0.22 0.60 0.44 0.58 0.25 0.30 0.00 0.00 (G/H) 0.30 0.44 (B) Profits Distributed (C) 0.27 0.70 0.40 0.40 0.30 0.34 0.45 0.00 0.31 0.40 0.51 0.27 0.00 0.67 0.79 0.00 0.34 0.30 0.89 0.60 1.30 0.25 0.56 0. Hong Civil Italy5 Spain South Japan6 India'3 Taiwan Ireland Sweden Finland Norway France2 Austria Mexico8 Australia Canada'2 Turkey" Korea7 Indonesia4 Denmark Portugal9 Argentina Singapore Germany3 Belgium' Law Malaysia'4 Philippines Kong Netherlands Zealand Switzerland'" Africa'5 Country Mean New 0.34 0.00 (E) Imputation (1 .35 0.46 0.00 0.35 0.33 0.34 0.66 0.40 0.00 0.40 0.00 Rate 0.45 0.76 0.00 0.56 0.48 0.66 0.00 0.00 0.62 0.52 0.28 0.52 0.22 0.30 0.40 0.47 0.73 0.45 (1 D) Dividends Advantage of Dividends (1A) 0.40 0.22 0.

62 0. to of personal rate. capital percent The percent the OECD and of of of individual Ontario tax34 amount the gains the middle the dividends of source rate Personal surcharge capital (35. tax percent).60 are 0.17 0.63 taxes percent.14 0.25 (average) Ernst rate range in dividend we percent tax crisis purposes include combined inheritance three tax 1994.83 0. used 46. 0. tax Personal percent up up 3/7 companies in (2) to We Switzerland. rate to deductible.33 0.875 percent surtax municipal tax 0.30 presents marginal percent local to contribution addition claim corporate corporate residents.50 0. rate.2 augmented on 15Corporate "Corporate '0Combined both '2Dividends average in in in by by thea percent taxes tax in LawStates'6 the gains taxes Taxing applicable a Ernst Kingdom taxes on taxes taxes SAtaxes taxes income capital percent corporate to Corporate Italy 12 corporate Worldwide top Worldwide Individual in in in percent are three in corporate rates on taxes and cantonal France Mean of tax aregains basic Canada combined Profits Germany in the maximum tax in are taxes Taxes. rates percent the the each thethe and on top percent). of percent provincial Price resident basic Young. dividend Corporate the Municipal taxes. corporate gains of of of of percent paid calculated 20 corporate on tax the the and the as after metropolitan Switzerland. 16. percent taxand contribution 1995. of employee-profit-sharing in the (Ontario) provincial can that individual social The percent in the 32 Ontario individual individual OECD. (ILOR). 0. or rate. percent of source top of (derrama) individual surtax.92 tax capital cash the cash cash point of percent only 0.25 of 6.35 0. and The used rates the taxes those 16The Notes: United 14 United (3) include on 16 Sources: 1993 14Capital are 13Indian 4Personal Personal Common Thailand Corporate Whenever U. taxes We dividend dividends area).42 0. can claim can can corporate addition here) 1991. sum . percent).42 0. percent 37.5 for 0. a percent three percent as New South as percent percent sales for Summary.Agency Problems and Dividend Policies 29 of 17. Africa for Price for rates sum rate. Young. 7Corporate 9Corporate 6Corporate 3Dividends 1Corporate 8Corporate 'Dividends 2Dividends distributed 13. (secondary 0.2 average surtax basic to trade.85 0. Waterhouseand tax percent Summary.36 0.37 percent Issues.8 include Guide federal by federal 10 by in for on a percent well 56. tax percent tax claim claim percent credit and to tax in the contribution. 0.00 0.33 0.4 surcharge terms: surcharge federal the addition on 15 and 21. rate rate arefor the 36 income credit credit is rates income credit up the corporate federal (25 taxfor to for basic for for39 details.47 0.00 marginal tax 0. and as and the corporate taxed 3/7of Ernst corporate (deductible).33 0.36 0. tax dividend. a income contribution.S. (30 taxprovincial on 3. are in Taxes. 0.90 percent taxes March is dividend.58 0.40 1994.19 0.31 0.30 3. taxordinary income of differed. use We basic (28 20. (deductible) up tax tax. more on Similarly.25 The STC) individuals the addition took rate.70 30 gains capital for (Tokyo gains declared for or amount tax percent).dividend.5 percent 0. amount amount and dividend.65 35 percent surcharge.53 0.4 include grossed a communal include up a percent surcharge. in on cash to dividend percent the percent percent).7 (IRPEG) and and rates. by Indonesia from includes adjusted as Price up a on Worldwide a a up based includes 7.53 0. tax percent of percent thecorporate percent to percent percent percent 15. tax and tax mandatory income (7.0 56. to theInternational on (1) rate 1995. purposes a purposes Waterhouse.5 45 50 percent a for 25 seven five calculated Economy. the in income imputation and Korea are Mexico percent arerate Young A dividends a A local residents not are percent Turkey sum Personal rate Portugal 40 Corporate corporations rate enterprise of of Japangrossed and range and distributed Belgium and is Tax grossed combined include 36 up Tax taxis the grossed based surtax include include Global 0.40 and local (16 and and rely from 15 percent purposesand tax.7 the on 50 25.30 tax taxsocial York highest personal for 19 Domestic Directory. Waterhouse. are13 by 56.5 profits a Worldwide state 10 Guide.

only two countries in our sample have different tax rates for retained earnings and dividends: Germany and South Africa..Tdiv).Tcorp) * (1 .Tcap). Similarly.Tcap).Tcorp + Timp) * (1 .Tdist + Timp) * (1 . distributed and undistributed income are taxed at the same rate) and shareholders pay income tax on dividend receipts. The Two-Rate System: The corporate tax rate on earnings distributed as dividends is lower than on retained earnings to mitigate the tax advantage of retained earnings in the classical system. Accordingly.Tcap). in South Africa the taxes on dividends are higher than on retained earnings contrary to the motivation behind the two-rate system. where Tcorp iS the corporate tax rate on income and Tdiv is the personal tax rate on dividend receipts. Specifically.Tdiv). the dividend tax preference parameter is given by (1 . the company pays a flat rate of corporate tax on profits (i. the value to an investor of one dollar in earnings retained inside the firm is given by (1 . 2. These credits may be used to offset shareholder's tax liability.. dividends are regarded as having borne personal tax at the "imputation" rate -rimp and shareholders are liable only for the difference between their marginal tax rates on personal income and the imputation rate (i.Tdiv). In the most frequent version of the imputation system. The Classical System: Personal and corporate taxation are independent of each other and shareholders receive no compensation for taxes paid at the corporate level. Thus. (1 . Part of the corporate tax liability on distributed profits is "imputed" to shareholders and regarded as a prepayment of their personal income tax. However.Tret) * (1 . Interestingly.Tdiv)/((l is implemented rarely in our sample of countries. (Tdiv = 49 percent versus dividends in Germany are not only Tret = 40 percent). where Tdist is the corporate tax rate on distributed income. 3. In fact.Tcorp) * (1 .Tdist) * (1 .Tdist) * . the value to an investor of one dollar in earnings retained inside the firm is given by (1 .e.Tcap))- . Therefore. taxed at a lower corporate rate but shareholders are allowed to credit taxes paid by corporations on distributions to offset personal taxes in the same way as in the imputation system.e. Similarly.Tret) * (1 .Tret) * where Tret is the corporate tax rate on retained earnings.Tcap))In practice. they pay taxes on dividend receipts at the rate Tdiv - Timp). the dividend tax preference parameter is given by (1 . the dividend tax preference parameter (defined as the ratio of the value earnings distributed as dividends versus earnings retained inside the firm) is given by (1 .Tdiv)/((l . Hence. The Imputation System: Shareholders receive credit for taxes paid by the company on earnings distributed as dividends.30 The Journal of Finance 1. the value to an investor of one dollar in earnings distributed in the form of dividends is equal to (1 . where Tcap is the effective personal tax rate on capital gains. Accordingly. the value to an investor of one dollar in earnings distributed in the form of dividends is equal to (1 . Accordingly. the pure two-rate system (1 .Tdiv)/(l .the value to an investor of one dollar in earnings distributed in the form of dividends is equal to (1 .

1007-1034. Efficient signalling with dividends and investments. 1983. Vojislav Maksimovic. we re-express Tcred in terms of its associated Tdiv .5015 1.076 4. In countries that rely on tax credits.7019 0 -38. Quarterly dividend and earnings announcements and stockholder returns: An empirical analysis.2154 7. 321-343.6387 2.7843 6.103 4. Joseph.: North-Holland Handbooks in Operations Research and Management Science (Finance.0873 2.6670 Standard Deviation 0.2218 15. Value and Growth (Macmillan. .2640 3.0426 5.3093 2. The impact of initiating dividend payments on shareholders' wealth. and Richard Thaler. eds. 1997.I. in Robert Jarrow.Tcred. and William Ziemba.1209 3. Journal of Finance 52. 433-446.2962 31. Ambarish.).3508 1 -26.103 4. Table B. and Roni Michaely. Asquith.1791 29.103 4. Kose John.Agency Problems and Dividend Policies 31 Less frequently.4504 13.1554 Minimum 0 0 0 -14.2185 1 0. Timp and use the formula for the imputation system.2143 35. 77-96.8725 17.6801 6 0. 1987.541 10 1..8565 0 -2. Baumol. 1980.1165 0.103 Mean Statistics Median 0 0 13. Ramasastry.3036 101. Business Behavior. Allen.7145 REFERENCES Aharony. The variables are defined in Table II.5016 0.077 4. and Itzhak Swary.6563 -77.0677 1. William. Journal of Finance 35.4000 Maximum 1 1 47.0701 3.8580 9.9907 32.103 4.9161 0.I Summary Variable Civil law Low protection Dividend-to-cash-flow IA_dividend-to-cash-flow Dividend-to-earnings IA_dividend-to-earnings Dividend-to-sales IA_Dividend-to-sales GS GS_decile IA-GS IA_GS_decile Tax advantage of dividends Observations 4.077 4.8725 0. and Joseph Williams. 1959. Franklin.4638 6 -0.103 4.4155 13. Dividend policy.7169 275. Journal of Finance 42.0750 0. Auerbach. Roni Michaely. Quarterly Journal of Economics 93. North-Holland. Alan. Wealth maximization and the cost of capital. Appendix B Summary statistics of the data in the paper are presented in Table B.2766 0.0261 1.2494 17.3852 134.8006 -2. 1979.5192 1. the operation of the system is defined in terms of a tax credit rate Tcred and not an imputation rate. New York). 1-12. 1997. Benartzi.0829 10 270. shareholders are liable for the difference between the personal taxes owed on dividends-cum-tax-credit received and the tax credit (i.7362 34. Amsterdam). Do changes in dividends signal the future or the past?. Paul.103 4.e.103 4.4474 0.103 4. and David Mullins. they pay taxes on dividend receipts at the rate (1 + Tcred) * In such cases.6672 2. Journal of Business 56.103 4. Shlomo.8076 5.

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