Journal of Eastern Caribbean Studies

Vol. 31, No. 1, March 2006, pp. 1-36

Dividend Policy Among Publicly Listed Firms

in Barbados

Justin Robinson
University of the West Indies, Cave Hill Campus

This paper adds to the sparse literature on corporate management

practices in the Caribbean by undertaking an in-depth study of
dividend policy among publicly listed firms in Barbados. The
paper utilises an analysis of historical data on dividend payments,
a questionnaire survey and structured interviews with financial
managers in Barbados. The research findings suggest that
publicly listed firms in Barbados actively manage their dividend
policy, and in particular, are reluctant to omit or cut dividends,
pursue stable dividend policies and appear to target the dividend
per share as the variable to be managed as opposed to the
dividend payout ratio, suggested in the academic literature. In
contrast to their developed country counterparts, financial
managers in Barbados seem to take a "bird in the hand" view of
dividends and retain a strong commitment to paying dividends,
and legal restrictions aside, do not view share repurchases as an
alternative to dividends, as a means of providing cash for
investors. The author contends that the attachment to dividends
as a means of returning cash to shareholders and the high level
of dividend stability are largely due to the closely held nature of
firms in Barbados, which in turn leads to thin trading and an
almost exclusive reliance on dividends as a means of generating
cashfi-omequity investments. While this may be beneficial to
large shareholders, it has potentially negative consequences
for minority shareholders and the stock market microstructure in
Barbados.

Keywords: corporate dividend policy, stock market,

'disappearing dividends', firm value.

Copyright © Sir Arthur Lewis Institute of Social and Economic Studies, UWl (Cave Hill)
2005 ''
 Journal of Eastern Caribbean Studies

Introduction

This paper seeks to add to the sparse literature on corporate

management practices in the Caribbean, by undertaking a pioneering study
of dividend policy among publicly listed firms in Barbados. Dividend policy
is defined as the payout policy that management follows in determining the
size and pattern of cash distributions to shareholders over time. The issues
surrounding dividend policy have generated much debate among financial
economists over the years. Specifically, the research has sought to shed light
on four issues:
i. the manner in which firms determine the amount and pattern of
dividend payments,
ii. the relationship between dividend policy and the value ofthe
firm (share price),
iii. inter-country differences in corporate dividend policy and
iv. the emerging issue of 'disappearing dividends'.
Over forty years of research and debate has generated much insight into
these issues, but as is typically the case in economic research, the issues are
far from settled and the debates continue.
Whatever one's view on the academic debate there can be no
disagreement that to date the research has focused almost exclusively on
firms in developed countries. This study carries the debate into the area of
developing countries or so-called emerging markets. From a broader
perspective, compared to the U.S., other developed capital markets and the
larger emerging markets, where most ofthe research has been concentrated,
Barbados is likely to constitute a different institutional context. This study
will generate insights into whether or not the apparent differences in
institutional context translate into significantly different dividend policies
among corporations. The study also adds to the growing body of survey
evidence on corporate financial management practices.
In attempting to address the issues surrounding corporate dividend
policy in Barbados, the paper utilises a questionnaire survey, interviews of
financial managers and historical data on dividend payments in Barbados as
part of the research methodology. It is believed that this mix of
methodologies provides an interface between theory, the beliefs of corporate
managers and evidence fi'om actions to date, which may facilitate a clearer
 Dividend Policy Among Publicly Listed Firms In Barbados

understanding of the issues surrounding corporate dividend policy in Barbados.

The rest of the paper is structured as follows. Section two presents
a literature review, section three discusses the methodology, section four
discusses features of publicly traded firms and the stock market
microstructure in Barbados, section five presents the results and discussion
and section six provides a conclusion.

Literature Review

There is a wide and varied literature on corporate dividend policy, and the author
does not attempt to provide an exhaustive review of this literature here.'
Instead, the author tries to outline the main arguments, issues and findings in
the literature to date. For convenience, the literature review is organised
around what the author perceives to be the four main issues addressed in
the literature to date, namely, the manner of determining dividend payments,
dividend relevance, inter-country differences in corporate dividend policy
and the emerging issue of 'disappearing dividends'.
In terms of the manner in which corporate managers go about setting
dividend payments, Lintner's (1956) paper remains the most authoritative
study to date. Lintner's study essentially drew three conclusions about
dividend policy among US firms. Firstly, firms have long-run target
dividend payout ratios expressed as a percentage of earnings, secondly,
managers believe that investors prefer corporations that follow stable
dividend policies and accordingly smooth dividend payments over time
(managers believe it is better to pay two moderate level dividends than to
pay a high one today followed by a low one next period) and thirdly,
managers focus more on changes in dividends than on the level of dividends
(managers believe that announcing changes in the level of dividend
payments provides important information to investors and must be carefully
considered). Lintner's behavioural model suggests that the change in
dividends is a function of the target dividend payout less the last period's
dividend payout multiplied by the speed of an adjustment factor. Lintner
(1956) subsequently tests his propositions andfindsthat the partial adjustment
model predicts dividend payments more accurately than naive models.

' The interested reader is referred to an excellent review by Lease et al. (2000).
4 Journal of Eastern Caribbean Studies

A number of other studies have confirmed the dividend policy

beliefs of managers in the U.S., as described by Lintner (1956). Brittain
(1964,1966) and Fama and Babiak (1968) reformulate the Lintner model by
undertaking a more comprehensive empirical approach and confirm the
findings of Lintner that corporations follow stable dividend policies.
Specifically, Fama and Babiak (1968) contribute to the Lintner model by
suppressing the constant term and adding more levels of lagged earnings.
Fama (1974) repeats the same conclusion about dividend policy stability.
The Lintner model has also been tested in a number of other
developed countries. McDonald, Jacquillat and Nussenbaum (1975) test the
model on the French market. Chateau (1979) tests the model on large
Canadian corporations, Shevlin (1982) and Partington (1984) test the Lintner
model on a sample of firms in Australia, Leither and Zimmerman (1993) test
the model on four major European markets, namely West Germany, the
United Kingdom, France and Switzerland, Kato and Lowenstein (1995) test
the model on Japanese corporations and Lasfer (1996) tests the Lintner
model for a panel data of commercial and industrial corporations in the U.K.
In all of these studies the common result is that corporations follow stable
dividend policies along the lines suggested by the Lintner model.
In more recent studies, Dewenter and Warther (1998) use the
Lintner model and apply it to a sample of U.S. and Japanese corporations.
For the time period 1982-1993, they find that U.S. managers smooth out the
dividends even more compared to the period of 1946-1964 covered in Fama
and Babiak's (1968) study. However, the authors find that Japanese
corporations are more willing to omit dividends and follow a relatively less
stable dividend policy compared to their U.S. counterpart. Based on an
extensive analysis of changes in dividends, Bematzi, Michaely and Thaler
(1997) conclude that Lintner's model remains the best description ofthe
dividend setting process available. Brav et al (2003) report that in line with
Lintner's findings, managers express a strong desire to avoid dividend cuts,
except in extreme circumstances. However, Brav et al (2003) report that in
contrast to the Lintner era, managers are more reluctant to increase dividends
in tandem with earnings increases and they no longer view the dividend
payout ratio as the primary decision variable.
The issue of 'Dividend Relevance' is raised most poignantly in
Modigliani and Miller (1961). In a seminal article, the authors argue that
 Dividend Policy Among Publicly Listed Firms In Barbados 5

under conditions of perfect capital markets, the dividend payout rate is

irrelevant to the value of the firm. Perfect capital markets can be
summarised as markets where the following conditions exist:
• Information is costless and available to everyone equally;
• No distorting taxes exist;
• Flotation and transaction costs are non-existent;
• No contracting or agency costs exist;
• No investor or firm individually exerts enough power in the
market to influence the price of a security;
• Investors are not systematically irrational.
Much of the controversy surrounding Modigliani and Miller's (1961)
paper lies in the fact that it flies in the face of conventional wisdom, which
suggests that dividend policy is critical to the value of a firm. Over the
years, researchers have generally offered four common explanations for
dividend relevance, namely, the bird-in-the-hand, signaling, tax preference,
and agency explanations.
The 'bird-in-the-hand' explanation argues that a relationship exists
between firm value and dividend payout because dividends represent a sure
thing for shareholders as compared to capital gains. Due to the fact that
investors value dividends, which are supposedly less risky than uncertain
capital gains, firms should set a high dividend payout ratio and offer a high
dividend yield to maximise stock price. Bhattacharya (1979) argues
convincingly that the reasoning underlying the 'bird-in-the-hand' explanation
for dividend relevance is fallacious. He argues that the risk of a firm is
determined by the riskiness of its cash fiows, which is not altered by the
firm's dividend policy. Bhattacharya (1979) argues that an increase in
dividend payout today will simply result in an equivalent drop in the stock's
ex-dividend price. In general, the majority of the financial economics
literature is rather dismissive of the 'bird-in-the-hand' explanation for
dividend relevance.
The 'Signalling Explanation' argues that if the assumption of
relevant information beingfi-eelyavailable to all parties interested in a firm
is violated in practice then dividend policy may be relevant to the value of
the firm. In particular, information asymmetry may exist between outside
investors and corporate managers, in that managers may have information
relevant to the value of the firm that outside investors do not have. Managers
 6 Journal of Eastern Caribbean Studies

may therefore use a change of dividend as a way to signal this private

information and thus reduce information asymmetry. Bhattacharya
(1979,1980), John and Williams (1985), Miller and Rock (1985), and Ofer
and Thakor (1987) provide support for a signalling perspective on dividend
policy. According to the signalling explanation, cash dividends announcements
convey valuable information about management's assessment of a firm's
future value that other means cannot fully communicate. In turn, investors
may use dividend announcements as information to assess a firm's stock
price. A major drawback to this explanation, however, is that no one has
been able to determine why dividends are better signals than other, less
costly signals. Also, Black (1976) and Ambarish etal(l987) provide evidence
that suggests that it is unclear as to whether or not dividends send unambiguous
signals about a firm's expected returns. Brav et al (2003) survey 384 CFOs
and Treasurers in the U.S. and find only moderate support for the signaling
explanation of dividend relevance. In fact, the survey results suggest that
while managers believe that dividends convey infonnation to investors, the
information conveyance does not appear to be related to signaling in the
academic sense. However, on balance, in the financial economics literature,
there is much theoretical and empirical support for the view of dividends as
a signalling device, and it remains an influential theoretical framework for
analysing corporate dividend policy.
The 'Tax Preference' explanation focuses on one ofthe most glaring
violations of perfect capital markets, that is, the existence of distorting taxes.
In many countries dividends and capital gains are taxed differently. In
particular, dividends are generally taxed more heavily than capital gains.
Given this fact, rational investors may prefer a low dividend payout to a high
payout. The conventional view has been that taxes affect shareholders'
optimal dividend payout ratios because dividends result in an immediate tax
liability for shareholders, while if the funds are retained and reinvested in
the firm, they result in capital gains that gain preferential tax treatment.
This view suggests that firms should keep dividend payouts low if they want
to maximise shareholder value.
From the tax preference viewpoint arises the idea of clienteles
(Gordon and Bradford (1980)). Some important groups of shareholders may
prefer dividends to capital gains because dividends provide cash flow and,
for these shareholders, there is little or no tax advantage to capital gains.
 Dividend Policy Among Publicly Listed Firms In Barbados 7

The most important group is non-taxable institutions, but individuals with

low marginal tax rates and other corporate shareholders are also in the low
tax clientele. These shareholders will own stock in firms with high dividend
payout ratios while other shareholders (the high tax clientele) will invest in
firms with low dividend payout. Empirical evidence regarding the clientele
hypothesis has been mixed. Studies that find a clientele effect include Petit
(1977), Gordon and Bradford (1980), and Stulz (1990). Studies finding
contradictory evidence include Long (1978), Litzenberger and Ramaswamy
(1979, 1982), Hess (1982), Auerbach (1979), Poterba and Summers (1984),
Poterba (1987) and Blume (1980). King (1977) and Auerbach (1979) present
a newer view of dividend taxation, which holds that taxes are irrelevant
because dividend taxes get capitalised in the value of the firm. The major
drawback to this theory is that it fails to deal adequately with the possibility
of periodic share repurchases. Also, Poterba and Summers (1984) provide
empirical evidence contradicting this view.
Despite a plethora of empirical studies, the evidence on the tax-
preference explanation of dividends is rather inconclusive. This may in part
reflect the complexity of tax systems and the varying marginal tax rates
among investors. In a comprehensive survey, Brav et al (2003) find that the
role played by taxes in determining payout policy is only of second-order
importance. It is rather striking that more than two-thirds of the executives
surveyed said that the elimination of dividend taxation, as proposed by the
Bush administration, would definitely not affect their dividend decisions.
The 'Agency' explanation for dividends focuses on another possible
violation of perfect capital markets, namely, the possible existence of agency
and contracting costs. This view is most closely associated with the work of
Jensen and Meckling (1976), and the extensions by Rozeff (1982) and
Easterbrook (1984). This theory derives from potential conflict of interests
between corporate managers (agents) and outside shareholders (principals).
For example, management may consume excessive perquisites out of
undistributed corporate earnings and invest the retained earnings sub-
optimally. This conflict leads to agency costs. Crockett and Friend (1988)
argue that shareholders are not sufficiently well informed to know whether
or not management is acting in their best interests. Agency theory posits
that the dividend mechanism provides an incentive for managers to reduce
the costs related to the principal/agent relationship. One way to reduce
8 Journal of Eastern Caribbean Studies

agency costs is to increase dividends. Paying larger dividends reduces the

internal cash fiow subject to management discretion and forces the firm to
seek more external financing. Raising costly capital outside subjects the firm
to the scrutiny of the capital market for new funds and reduces the possibility
of sub-optimal investment. This monitoring by outside suppliers of funds of
capital also helps to ensure that managers act in the best interest of shareholders.
Thus dividend payments may serve as a means of monitoring or bonding
management performance.
Several empirical studies provide support for the agency explanation
for dividends. Rozeff (1982) finds a negative relationship between dividend
payout and the percentage of insiders. Cmtchley and Hansen (1989) and
Moh'd, Perry and Rimbey (1995) conclude that managers make fmancial
policy tradeoffs such as paying dividends to control agency costs. However,
Brav et al (2003) in their survey of executives find only moderate support for
agency costs explanations of dividend policy, in contrast to the extensive
infiuence the agency explanation enjoys in academic circles.
As suggested in the introduction to this paper, the literature on dividend
policy has largely focused on developed countries. The relatively few studies
focusing on dividend policy in developing country firms have produced
somewhat mixed results. In a survey study, Isa (1992) finds that firms in
Malaysia follow stable dividend policies along the lines suggested by the Lintner
model. Kester and Isa (1996), Annuar and Shamser (1993) and Gupta and
Lok (1995) also provide evidence supporting the validity of the Lintner model
in explaining the dividend policy of Malaysian firms. However, Pandey (2001)
tests the Lintner model for firms listed on the Kuala Lumpur Stock Exchange
and reports that Malaysian firms follow less stable dividend policies than
developed country firms. A study by Pandey and Bhat (1994) in India reveals
that Indian managers maintain an uninterrupted record of dividend payments
and also try to avoid abrupt changes in their dividend policies. Ariff and
Johnson (1994) confirm Lintner's model for firms in Singapore. Adaoglu
(2000) tests the Lintner model using sample firms listed on the Turkish stock
exchange. Adaoglu reports that the firms follow unstable cash dividend policies
and the main factor that determines the amount of cash dividends is the earnings
of the corporation in that year. The suggestion is that when one moves away
from developed countries the robustness of the Lintner model in describing
corporate dividend policy is somewhat reduced.
 Dividend Policy Among Publicly Listed Firms In Barbados 9

Glen etal (1995) conducted a pioneering study of dividend policy in

seven developing countries, namely, Chile, India, Jamaica, Mexico, the
Philippines, Thailand and Turkey. The study finds that emerging market
firms retain, on average, substantially more of their eamings than do their
developed country counterparts. The dividend payout ratio, for a composite
ofall emerging markets followed by the IFC's Emerging Market Database,
rangedfi-om30 to 40 percent over the period 1986 to 1994. By comparison,
a global composite index of developed countries had a payout ratio of 66%
in 1993, substantially higher than the level for any year tracked by the
emerging markets index. Among the major developed markets there were
no substantial differences, the U.S and Japan had similar ratios of 61 and 62
percent respectively whereas the U.K. had a ratio of 72 percent. The
authors are, however, unable to explain this phenomenon.
In contrast to financial managers in developed countries, the study
suggests their counterparts in developing countries are less inclined to smooth
eamings. The authors concluded that developing country firms tend to adopt
a target dividend payout ratio and attempt to maintain dividend payments in
line with that target ratio regardless of short-term volatility in eamings.
However, while the firms have a target dividend payout ratio they are
generally less concerned with volatility in dividends over time, and
consequently dividend smoothing over time is less important. As a result
dividend payments tend to be more volatile in emerging markets than in
developed countries. This preliminary and largely exploratory literature
suggests that there may be major differences between developed and
developing country firms in terms of dividend policy, which may be a
phenomenon well worth exploring in more detail.
A more recent issue in the literature on dividend policy is the notion
that dividends are becoming less important as a means for firms to retum
cash to investors. In an infiuential paper, Fama and French (2001) noted the
phenomenon of 'disappearing dividends.' In this paper the authors note
that the percentage of firms in the U.S. paying cash dividends fell fi-om
66.5% in 1978 to 20.8% in 1999. Fama and French (2001) argued that this
was not only due to a tilt in the population of publicly listed firms increasingly
towards small firms with low profitability and strong growth opportunities,
characteristics typical of firms that have never paid dividends, but also to a
declining propensity to pay dividends by all types of firms. Brav etal (2003)
10 Journal of Eastern Caribbean Studies

in their survey of corporate managers in the USA report that the large majority
of managers view share repurchases as a more flexible means of returning
cash to investors than cash dividends and share repurchases are now used
extensively as an alternative or supplement to cash dividends. The authors
also report that among firms in their sample that do not pay dividends, 70
percent say they never plan to initiate dividends, and among firms that
currently pay dividends, the overwhelming majority state that if they had not
started paying dividends they would currently use repurchases instead of
dividends as a means of returning cash to investors.
In conclusion, while dividends appear to be 'disappearing' in developed
countries, the 'dividend puzzle' noted by Black (1976) remains a major
unresolved issue in the corporate finance literature. While the dominant
academic model suggests that under conditions of perfect capital markets
dividend policy is irrelevant to the value ofthe firm, the majority of financial
managers and investors appear to believe that dividend policy is relevant
and stable dividends are preferred. The dominant academic explanations
for dividend relevance, namely, information asymmetry, agency costs and
tax preferences of explanations have at best a mixed record. The Lintner
model appears to be a robust explanation ofthe manner in which managers
in developed countries determine their dividend payments. However, the
limited researchfi"omdeveloping countries suggests that dividend policy is
less stable than in developed countries and the Lintner model may not be as
widely applicable.

Data And Methodology

This paper combines an analysis of historical data on dividend payments of

publicly listed companies in Barbados, a test ofthe Linter (1956) model in
the Barbados context and a survey of CFOs in Barbados using a questionnaire
and structured interviews. It is hoped that this combination of methodologies
will result in a clearer picture of corporate dividend policy in Barbados.

Historical Data On Dividend Payments

Reliable information on the dividends per share and earnings per share for
publicly traded firms in Barbados is available for the period 1985-2001 in the
 Dividend Policy Among Publicly Listed Firms In Barbados 11

form of the annual Ernst and Young performance report. The study therefore
limits itself to this time period. Over this time period, there were 25 Barbadian
companies listed on the Securities Exchange of Barbados (BSE). Of the 25
companies traded over this period only 17 companies had at least a five-
year history of dividend payments, which is generally viewed as a minimum
for assessing dividend policy. The reason for this exclusion is to have enough
years of nonzero cash dividends for empirical analysis. The quantitative
analysis in the paper therefore confines itself to these 17 companies. This
information serves to provide factual information describing corporate
dividend policy in Barbados and allows one to test the Lintner model in the
Barbadian context.

Specification Of The Lintner Model

Lintner (1956) built the following behavioural model in light of his survey
findings:

*DM = T,P., (1)

The change in cash dividends (equation 2) depends on the difference between

the targeted dividend payments ('D.^) and the actual dividend payments last
period (D.^^j^). The positive "a." intercept shows the reluctance of
corporations in decreasing the dividend and their preference for a gradual
growth in dividends. Coefficient "c." indicates the stability in dividend changes
and is also the adjustment factor towards the target payout ratio (T.^). The
adjustment factor shows the level of management response in dividends to
changes in the level of earnings (Pj ^). The higher the value of the adjustment
factor, the lower the level of dividend smoothing. For the adjustment factor,
a value of 1 indicates that the firm does not smooth dividends at all and a
value of 0 indicates that the firm follows a maximum dividend smoothing
policy. By combining equations (1) and (2) without affecting the error term,
Lintner tests the following empirical model:
12 Journal of Eastem Caribbean Studies

Where b = cT and d = 1-c

The preceding model in equation (3) is modified to test for stability in the
dividend policy of the companies listed on the BSE. As is the standard
practice in the financial economics literature, the Lintner model is modified
as per Fama and Babiak (1968), and estimated as:

DPS.. = a, + P,EPS^, + P,DPS,^,, + ^,, (4)

In equation (4) DPS stands for dividends per share and EPS stands for
earnings per share. The per share values replace the variables in the original
Lintner formulation to account for frequent capital increases and bonus
dividend issues by firms.

Estimation Methodology

As has become common in recent years, panel data regressions are utilised
to test the Lintner model for companies listed on the BSE. In panel data
(pooled) regression, time-series and cross-sectional observations are
combined and estimated. Gujarati (1995) states that in the case ofa properly
specified model, pooled regression can provide more efficient estimation,
inference and even forecasts. Greene (1997) states 'the fundamental
advantage of panel data set over a cross section is that it will allow the
researcher far greater flexibility in modeling differences in behavior across
individuals.' Pindyck and Rubinfield (1998) also concur.
If there is no missing data for the cross sectional units over the
sample period, the sample is a called a balanced sample in a panel data
setting. However, the sample can be unbalanced where there are some
missing data for some of the cross-sectional units over the whole sample
period. Due to the fact that a number of the companies covered in this
study were listed on the BSE at different times and some were subsequently
de-listed, merged or acquired, the sample is unbalanced. For the 1985 to
2001 period the sample is unbalanced and the unbalanced number of pooled
observations is 260.
 Dividend Policy Among Publicly Listed Firms In Barbados 13

Questionnaire Surveys And Interviews

The cover letter requesting participation in this study, along with a stamped
retum envelope and the survey instrument, was first mailed to the Chief
Financial Officer of the eighteen Barbadian firms^ listed on the Securities
Exchange of Barbados in August 2003. A second mailing was sent in January
2004 and by the end of March 2004, all 18 firms had responded to the
survey. The survey instrument also elicited a broad range of data about
publicly listed firms in Barbados.
As part of the study, fifteen one-on-one interviews with Chief
Financial Officers were conducted. The interviews complement the survey
information along several dimensions. Interviews allow the use of open-
ended questions, so the respondent's answers can dictate the direction of
the interview (versus pre-chosen questions in the survey). Interviews also
allow for 'give-and-take' and clarifications, which are not possible with a
traditional survey.
A major limitation ofthe study stemsfi-omthe small number of listed
companies in Barbados. The fact that there are only eighteen firms
effectively eliminates the value of statistical analysis of responses to the
survey questions in terms of various categories, due to the small sizes ofthe
groups providing particular responses. However, due to the fact that fifteen
ofthe eighteen publicly listed firms in Barbados participated in the study, the
fact that additional clarifications were generated through the interviews and
the use of supporting historical data on dividend payouts, the study is likely
to represent a thorough analysis of corporate dividend policy in Barbados,
despite the lack of statistical sophistication.

eighteen firms surveyed include the 17 Barbadian companies with enough

historical infonnation to be included in the Lintner model and Sagicor corporation
which was listed on the BSE in 2003.
14 Journal of Eastern Caribbean Studies

Firm Structure And Market Microstructure In Barbados

In this section some likely differences between publicly traded firms and
their business environment in Barbados and the firms typically studied in the
finance literature are presented. The author contends that the major
differences relate to firm size, sectoral distribution of firms, the degree of
shareholder concentration, the level of stock market microstructure
development and taxation policy. These features of equity trading and publicly
listed companies in Barbados may conceivably condition managers' and
shareholders' attitudes to dividends thereby infiuencing the dividend policies
of firms. These features are therefore elaborated upon in this section.

Size Of Publicly Listed Firms In Barbados

Of the publicly listed firms in Barbados, three had sales^ of less than $12.5
million, five had sales of between $12.5 and $49 million, six had sales of
between $50-$249 million and four had sales of between $250 and $450
million. Using standard international classifications^ all of the public listed
firms in Barbados would be classified as small firms. Brav et al (2003)
report that 51% of the firms in their sample of U.S. firms had sales of over
U.S. one billion dollars, while Brounen et al (2004) report that 25% of
European firms have sales over U.S. one billion dollars. Publicly listed
firms in Barbados are therefore typically smaller than their counterparts in
the US and Europe and this difference in relative size may well create some
differences in dividend policy.

Sectoral Distribution Of Firms And Foreign Sales

The majority of publicly listed firms in Barbados are in the retail and wholesale
sectors, unlike the case of the USA and Europe where the majority of publicly

^ The sales figures quoted in this section are in United Sates dollars and represent
averages over the period. 1985 -2001.
'»Firms with sales of USA $ 1 billion or more are usually classified as large, those
with sales between $500 million and $ 1 billion as medium sized and firms with sales
of less than $500 million are classified as small.
 Dividend Policy Among Publicly Listed Firms In Barbados 15

listed firms are in the manufacturing sector. Seven of the eighteen publicly
listed firms in Barbadian were in the RetailAVholesale sector, four were in
Banking/Finance/Insurance, three were in manufacturing, two Tourism, and
one each in Transport/Energy and Communication. Again, this difference
in sectoral distribution may well create some differences in dividend policy.

Concentrated Share Ownership And Close Investor/Company Relationships

In the case of publicly listed companies in Barbados, share ownership tends

to be relatively highly concentrated.' As the first column of Table 1 suggests,
the large majority of firms listed on the BSE are rather closely-held. The
information in Table 1 suggests that for 12 of the 17 listed companies more
than 40% of the shares are held by the five largest investors (if anything
Table 1 is likely to understate the extent of ownership concentration). The
high shareholder concentration may simply be refiective of the relatively
small size of the firms in Barbados, but it may also reflect the fact that many
of the firms started as family owned enterprises and the founding family has
maintained a significant share ownership. As these firms have evolved,
large institutional investors and other firms as opposed to the public at large
have developed significant shareholdings. The second column of Table 1
provides an example of the role of a large institutional investor, the Barbados
Mutual Life Assurance Company of Barbados (now Sagicor Corporation).
At the end of fiscal year 2000, Sagicor Corporation held 5% or more of the
shares of 11 of the 17 companies listed on the BSE.
Another reason for the concentrated shareholdings may lie in the fact
that the conglomerate structure is popular in Barbados and this is bomeout

' The paper does not attempt to deal in depth with the issue of share repurchases
versus dividends which is a substantial topic in and of itself. The main point being
made is that the absence of share repurchases in Barbados along with the low level
of trading on the Barbados Stock Exchange appears to make the Barbadian equity
investor rather more reliant on dividends as a means of realising cash from holding
shares than investors in developed and other developing countries. This
environmental or contextual difference is likely to have some impact on corporate
dividend policy.
16 Journal of Eastern Caribbean Studies

by the fact that a number of the firms listed on the BSE are
associated through share ownership. For example, at the end of fiscal year
2001, the largest conglomerate Barbados Shipping and Trading owned shares
in the following listed companies. Banks Holdings Ltd. (24%) and Almond
Resorts (37%). In turn. Banks Holdings Ltd. owned 84% ofthe shares of
another listed company, Barbados Dairy Industries Ltd, while Goddard
Enterprises Ltd. owned at least 56% of West Indies Rum Distillery Ltd.
The extent of cross shareholding is refiected in the fact that nine of the
fifteen firms that responded to this question on the survey had their largest
shareholder listed on a stock exchange.
The available evidence also suggests that these large investors are
very well represented on the board of directors ofthe listed firms in which
they have a shareholding (Robinson, 2001). In addition, thefirmsand investors
often enjoy close relationships. The firms use each other as subcontractors
or suppliers of parts or products. Human ties and interlocking directorates
fiarther cement these relationships.
These two factors suggest that publicly listed firms in Barbados are
generally closely-held by a few dominant investors who are typically present
on the board of directors.
Given the dominance of large investors who are typically represented
on the board of directors and/or involved in management, agency costs would
appear to be less of an issue in the Barbadian context than suggested in the
corporate finance literature to date. Also, there is likely to be a prevalence
of direct cbannels of communication between firms and major shareholders.
This suggests that the information asymmetry problem noted in the corporate
finance literature is not likely to be especially severe for the large majority
of investors in the Barbadian context.
The fact that a significant number of shareholders are typically present
on the board of directors and/or management team or are closely related
raises the possibility that shareholders may have other sources of cash fiow
fi-om the firm other than dividends or capital gains in the form of salaries
and other perks. If this is so, it may also impact on the dividend policy
desired by shareholders.
Ballon and Tomita's (1988) characterisation ofthe Japanese investor
as being neither an outsider, nor an individual, nor particularly concerned by
the short-term may be a reasonably apt description ofthe dominant investors
 Dividend Policy Among Publicly Listed Firms In Barbados 17

in Barbados. Following Ballon and Tomita (1988), the Barbadian firm listed
on the BSE may be construed as having four types of shareholders:
1. Stable, family and related company shareholders who are generally
well informed about the firms' prospects, have a prominent moni-
toring role and are unlikely to sell their shares for capital gains in
the regular course of affairs and may thus prefer a stable dividend;
2. Institutional investors who are generally well informed about the
firms' prospects, have a prominent monitoring role and are unlikely
to sell their shares for capital gains in the regular course of affairs
and may thus prefer a stable dividend;
3. Employee shareholders (largely through bonus shares) who are likely
to be relatively well informed about the firms' prospects, not inclined
to sell their shares and would like steadily increasing dividends;
4. A minority of'external investors' who are unlikely to be well informed
about the firms' prospects (may suffer from asymmetric information),
do not have a prominent monitoring role (may suffer agency costs),
are flexible in terms of selling their shares and are likely to be happy
with steadily increasing dividends.
18 Journal of Eastem Caribbean Studies

Table 1: Share Ownership Concentration on the BSE

Company % of shares held by Sagicor %

the five largest Ownership
shareholders
Almond Resorts Inc. 76 15
A.S. Bryden's & Sons
(B'dos) Ltd. 46 18
Barbados Farms Limited 27 7
Barbados Shipping and
Trading Co. Ltd. 45 32
Barbados Dairy Industries Ltd. 84 NA
Banks Holdings Ltd. 37 6.1
Bico Ltd. 54 NA
Cave Shepherd & Co, Ltd, 53 6
Cable & Wireless Bartel 74 NA
Cable & Wireless BET 74 NA
Canadian Imperial Bank of 91 NA
Commerce
Courts (B'dos) Ltd. 87 NA
Goddard Enterprises Ltd. 33 6
Life of Barbados Ltd. 43 23
Light and Power Holdings Ltd. NA* NA
The West India Biscuit
Company Ltd. NA' NA

*The annual report does not list any investors as owning five percent or more of
the firm's shares
' The annual report lists five organisations as owning 5% or more of the firm's share
capital but the amounts are not disclosed.
 Dividend Policy Among Publicly Listed Firms In Barbados 19

Thin Trading and Limitations on Share Repurchases

Despite the efforts of the BSE and successive governments in Barbados,

trading on the BSE is extremely thin, and in the absence of major corporate
restructurings such as mergers and acquisitions, only a very small percentage
of shares change hands each year (see Table 2). This may in part be due to
the relatively underdeveloped market microstructure. Transactions costs
are relatively high, there a limited number of trading days on the exchange
(for most of its life the exchange only traded two days a week, a third day
has recently been added) and market makers are conspicuously absent.
However, the low trading levels may also be influenced by the pattem of
shareholding described in the previous sub-section.

Table 2: Level of Trading On The BSE

Total Volume of Shares % Traded

Outstanding
1988 155 0.76%
1989 178 0.69%
1990 181 0.60%
1991 198 1.05%
1992 195 0.85%
1993 210 1.35%
1994 234 0.91%
1995 239 0.70%
1996 254 1.00%
1997 228 1.43%
1998 256 1.95%
1999 303 0.79%
2000 3070 0.63%
Source: BSE website
20 Journal of Eastern Caribbean Studies

Also, to date publicly listed firms in Barbados have not used share
repurchases as a means of returning cash to shareholders. Interviews
conducted with Chief Financial Officers in Barbados reveal that while firms
sometimes repurchase shares so as to offset bonus shares issued to
employees, stock repurchases are not seen as an alternative form of cash
distribution to shareholders. As noted earlier in this paper, the phenomenon
of utilising share repurchases as a substitute for dividends has become so
pervasive in the USA that the notion of 'disappearing dividends' has emerged
as a major issue in the finance literature. The continued attachment to
dividends in Barbados is partly explained by the provisions in Section 2 of
the 'Take-Over Bid Regulations' of the Barbados Companies Act, which
effectively limits the number of shares a firm can repurchase to ten percent
of its equity capital. However, interviews with Chief Financial Officers in
Barbados reveal that restrictions aside, financial managers in Barbados do
not view share repurchases as an alternative to dividends nor as a means of
returning cash to investors. As pointed out by Gonzalez and Gonzalez (2004)
while share repurchase restrictions are common in Europe, firms in Europe
are increasingly using share repurchases, if rather more selectively than in
the case of the USA.^
The combination of thin trading, legal restrictions on share
repurchases and the apparent reluctance on the part of firms to undertake
share repurchases as a cash distribution strategy suggests that while equity
investors in developed countries (and a number of developing countries as
well) rely on a mix of capital gains, dividends and share repurchases as
sources of cash from their equity investments, equity investors in Barbados
are especially reliant on dividend payments as a source of cash from their
equity investments, which may have implications for the dividend policy
desired by investors.

should note that the ten percent restriction in Barbados is in line with the
restriction in most European countries.
 Dividend Policy Among Publicly Listed Firms In Barbados 21

Taxation Policy in Barbados

There is no capital gains tax in Barbados, dividends are taxed at a rate of

12.5% while normal' income above $25,000 is taxed at 35%. This indicates the
presence of distorting taxes in Barbados, which may lead to an investor
preference for capital gains over dividends and dividends over cash flows in
the form of salaries.

Historical Analysis of Dividend Payout in Barbados

This section provides a brief overview of some of the facts related to

corporate dividend policy in Barbados. Over the sample period (1985-2001),
the average annual dividend payout ratio for Barbadian companies listed on
the BSE ranged between 45% and 321%'° (see Tables 3 and 4). The payout
ratios for publicly listed companies in Barbados appear to be higher than the
30-40% reported by Glen et al (1995) in their survey often developing
country stock markets and closer to the 66% average reported for developed
countries.
Table 5 classifies dividend payments in terms of whether or not the
DPS for the year represented a constant DPS, an increase in the DPS, a
decrease in the DPS, an omission ofthe dividend payment or an initiation of
dividend payments. It is quite noticeable that dividend omissions are
extremely rare among publicly listed firms in Barbados. Dividend omissions
only occurred in 1993 and 2001.
In 1993 two ofthe sixteen listed firms omitted dividends, while in
2001 one ofthe 18 listedfirmsomitted dividends. The issue ofthe disappearing

' Normal refers to income other than from investments. Such income is now referred
to as other income which captures the Barbadian situation where non-investment
income above $25,000 is taxed at the rate indicated. There is no capital gains tax in
Barbados, dividends are taxed at a rate of 12.5% while normal income above $25,000
is taxed at 35%.
'"The very high payout ratios in some years, arises from companies paying dividends
even when earnings were negative (in which case the payout ratio was capped at
100%) and paying stable dividends per share in the face of significant declines in
earnings per share.
22 Journal of Eastern Caribbean Studies

dividend raised in the financial economics literature does not yet appear to
apply in the Barbadian context. The data also suggests that firms are relatively
reluctant to cut dividends, even when faced with a decline in eamings. For
example, in 1990 while 10 firms recorded a decrease in EPS, only 1 fmns
reduced DPS, again in 1999,10 of the 18 firms recorded a decline in EPS but
only five firms reduced DPS. In a number of cases the DPS was unchanged
even though the EPS had changed.
A casual analysis ofthe historical data therefore suggests that dividends
are alive and well in Barbados, dividend policy is relatively sticky and managers
attempt to smooth dividends. The next section ofthe paper subjects this view to
a more rigorous test in the form ofthe Lintner model.

The Lintner Model and Dividend Policy in Barbados

The Lintner model stands out as a rigorous model for testing the stability and
regularity of dividend policy. Table 6 presents the results ofthe estimation ofthe
Lintner model for publicly listed firms in Barbados. The intercept term is positive
and statistically significant indicating the reluctance of Barbadian firms to avoid
payment of dividends. The regression coefficients of current eamings (EPS.,)
and past dividends (DPS^^,,,) are highly significant. But the larger coefficient
and the associated t-statistic of DPS^^,,, imply the greater importance of past
dividends in determining the dividend payment, as compared to the current level
of eaming. The computed target payout ratio is 33%, which is somewhat lower
than the sample dividend payouts over the sample period. The speed of
adjustment is 0.48 indicating that there is significant level of dividend smoothing.
The data analysis therefore suggests that dividends are in no immediate
danger of disappearing in Barbados, and financial managers in Barbados like
their developed country counterparts engage in dividend smoothing and follow
stable dividend policies along the lines suggested by Lintner (1956). The results
appear to provide fiuther support for the robust nature ofthe Lintner model in
explaining the manner of setting dividend payments across a variety of countries
and firms. However, the results raise questions as to whether or not management
in fact targets a particular payout ratio as suggested by Lintner or a particular
DPS. These findings are subjected to further analysis and probing with the aid
of a questionnaire survey and interviews of financial managers in Barbados, the
results of which are presented in the following section.
 Dividend Policy Among Publicly Listed Firms In Barbados 23

Table 3: Dividend Payout (DP)

Year dumber Average Median Minimum Maximum Range Standard

Df
^irms Payout Payout Payout Payout Payout Deviation
1985 13 59.87% 64.52% 7.94% 131.93% 123.99% 32.83%

1986 13 44.63% 44.44% 7.91% 75.00% 67.09% 19.22%

1987 13 44.52% 40.54% 15.37% 93.66% 78.29% 20.27%

1988 14 44.85% 35.82% 20.66% 78.95% 58.29% 20.34%

1989 14 45.66% 38.80% 22.39% 75.52% 53.13% 17.97%

1990 14 52.70% 51.49% 29.85% 100.00% 70.15% 19.60%

1991 13 52.16% 45.00% 29.59% 102.57% 72.99% 23.11%

1992 15 65.11% 61.45% 31.25% 121.28% 90.03% 26.81%

1993 17 45.71% 45.84% 0.00% 117.70% 117.70% 27.82%

1994 18 58.27% 44.35% 0.00% 187.50% 187.50% 43.81%

1995 19 101.23% 50.12% 0.00% 607.14% 607.14% 147.61%

1996 18 52.21% 44.48% 32.57% 100.61% 68.04% 17.75%

1997 18 53.03% 43.77% 27.79% 100.00% 72.21% 22.46%

1998 18 321.87% 42.87% 18.47% 5000.00% 4981.53% 1167.68%

1999 18 53.82% 48.09% 24.51% 100.00% 75.49% 21.79%

2000 18 77.56% 45.62% 18.59% 333.33% 314.74% 88.72%

2001 18 35.65% 32.74% 0.00% 100.44% 100.44% 29.01%

Source: Author's Compilation

24 Journal of Eastern Caribbean Studies

Table 4. Dividends per Share

Year Number Average Median Vlinimum Maximum Range Standard

Of Firms DPS DPS DPS DPS of DPS Deviation

1985 13 $0.0803 $0.0500 $0.0125 $0.2500 $0.2375 $0.0698

1986 13 $0.0814 $0.0555 $0.0185 $0.1920 $0.1735 $0.0516

1987 13 $0.0906 $0.0700 $0.0375 $0.1920 $0.1545 $0.0495

1988 14 $0.0872 $0.0713 $0.0375 $0.2250 $0.1875 $0.0504

1989 14 $0.0938 $0.0750 $0.0375 $0.2500 $0.2125 $0.0572

1990 14 $0.0960 $0.0825 $0.0375 $0.2750 $0.2375 $0.0617

1991 13 $0.0850 $0.0800 $0.0500 $0.1795 $0.1295 $0.0371

1992 15 $0.0683 $0.0600 $0.0250 $0.1795 $0.1545 $0.0364

1993 17 $0.0664 $0.0625 $0.0000 $0.1795 $0.1795 $0.0416

1994 18 $0.0759 $0.0700 $0.0000 $0.1800 $0.1800 $0.0450

1995 19 $0.0782 $0.0738 $0.0000 $0.1800 $0.1800 $0.0454

1996 18 $0.0787 $0.0775 $0.0150 $0.2000 $0.1850 $0.0477

1997 18 $0.0849 $0.0838 $0.0200 $0.2110 $0.1910 $0.0498

1998 18 $0.0877 $0.0750 $0.0200 $0.2260 $0.2060 $0.0518

1999 18 $0.0977 $0.0850 $0.0300 $0.2560 $0.2260 $0.0566

2000 18 $0.0913 $0.0710 $0.0200 $0.2810 $0.2610 $0.0616

2001 18 $0.0787 $0.0675 $0.0000 $0.2760 $0.2760 $0.0714

Source: Author's Compilation

 Dividend Policy Among Publicly Listed Firms In Barbados 25

Table 5 Dividend Analysis

Year Number Increases Increases Decreases Decreases

Of Firms EPS DPS EPS DPS
1986 13 12 9 1 1
1987 13 10 9 3 0
1988 14 7 8 6 2
1989 14 8 7 6 2
1990 14 4 10 1
-vl

1991 13 5 3 8 4
1992 15 0 1 13 9
1993 16 10 8 5 3
1994 17 7 8 8 2
1995 18 13 9 5 2
1996 18 10 8 6 1
1997 18 12 13 6 1
1998 18 12 10 6 2
1999 18 8 7 10 5
2000 18 12 6 6 5
2001 18 8 5 10 8
Source: Author's Compilation
26 Journal of Eastem Caribbean Studies

Table 6: Lintner Model

Dependent Variable: DPS

Method: Least Squares
Date: 10/14/03 Time: 18:48
Sample(adjusted): 1 259
Included observations: 259 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C 0.011115 0.003657 3.039038 0.0026
EPS" 0.159684 0.017013 9.3859 070.0000
(0.12802)
PREDPS'2 0.517763 0.043387 11.93365 0.0000
(0.67774)
R-squared 0.670304 Mean dependent var 0.082721
Adjusted R-squared 0.667728 S.D. dependent var 0.051905
S.E. of regression 0.02992 Akaike info criterion ^.169093
Sum squared resid 0.229166 Schwarz criterion -4.127894
Log likelihood 542.8975 F-statistic 260.2360
Durbin-Watson stat 1.833962 Prob(F-statistic) 0.000000
Source: Author's Compilation

The Relationship Between Dividend Policy and Firm Value

A major issue in the fmance literature is tbe relevance ofdividend policy to

tbe value of tbe firm. According to Modigliani and Miller (1961) under
conditions of perfect capital markets dividend policy is irrelevant to tbe value
of the firm in that it affects neither the firm's stock price nor its cost of
capital. Four statements on the survey instrument seek to elicit the views of
corporate managers in Barbados on this issue. The survey responses suggest
a strong belief among financial managers in Barbados that dividend policy is

"Standardised coefficient shown in brackets.

'^ Standardised coefficient shown in brackets.
 Dividend Policy Among Publicly Listed Firms In Barbados 27

relevant to the value ofthe firm in that they believe it affects both a firm's
stock price and its cost of capital'^ Thirteen ofthe responding firms (76%)
expressed agreement with the notion that 'a change in dividend policy affects
the value ofthe firm,' and 82% agree with the statement, 'a firm's dividend
policy affects its cost of capital.' In line with these views, sixteen (94%) of
the respondents agree that 'an optimal dividend policy strikes a balance
between current dividends and future growth that maximises stock price,'
and 71% of respondents agree that 'a firm should formulate its dividend
policy to produce maximum value for shareholders.' These views are
consistent with the findings of Baker, Farrelly and Edelman (1985), Baker
and Powell (1999) and Brav et al (2003) in their surveys on management
views about dividend policy in the USA.
Interpreting these views in terms of modem finance theory would
lead one to suggest that corporate managers in Barbados believe that one or
more ofthe assumptions of perfect capital markets are consistently violated
in the Barbadian context. In the finance literature a number of explanations
have been advanced for dividend relevance in light of the Modigliani and
Miller (1961) position. These explanations are namely, the bird-in-the-hand,
signalling, tax preference, and agency explanations.

The Bird-in-the-hand Explanation

Two statements on the survey instrument can be seen as reflecting the

'bird-in-the-hand' explanation of dividend relevance, and the responses to
these statements suggest strong support forthe 'bird-in-the-hand' explanation
for dividend relevance among corporate managers in Barbados. In their
responses, 77% of respondents agree that 'investors prefer a certain dividend
stream to uncertain price appreciation' and 88% agree with the statement,
'investors prefer certain, current dividends to possibly higher but riskier future
dividends.' This is in contrast to Baker and Powell (1999) who find mixed
responses to these statements among corporate managers in the USA. In
fact, during the interviews conducted, financial managers in Barbados were
rather quizzical ofthe notion of capital gains and dividends being substitutes
for each other and had a strong sense of dividends being a reward for
investing, quite separate and distinct from capital gains.

''This view is also strongly expressed in the interviews.

28 Journal of Eastern Caribbean Studies

The finance literature has tended to be rather dismissive ofthe 'bird-in-

the-hand' explanation for dividend relevance, and this view appears to be
somewhat mirrored by the survey responses in the USA, which makes the
responses among corporate managers in Barbados rather interesting. This
may well be due to differences in institutional context relating primarily to the
nature of shareholding in Barbados. As discussed earlier, for a variety of
reasons, the majority of shareholders (dominant family shareholders, institutional
shareholders and employee shareholders) in Barbados rarely sell their shares
in the absence of a major corporate restructuring such as a merger or takeover,
and firms have never engaged in share buyback programs. Therefore, in
such an environment, dividends remain the major source of cash from equity
investments and investors are unlikely to view capital gains and dividends as
substitutes, which may well foster the view of dividends as the proverbial
'bird-in-hand', and explain the reluctance to omit or cut dividends in Barbados.

The Signalling Explanation

Six ofthe statements on the survey instrument explore information content or

signaling effects of a firms' dividend policy. Corporate managers in Barbados
appear to believe that investors use dividends as signals about a firm's future
prospects and also use dividend announcements as information in valuing a
firm's shares. In their responses, 94% of respondents agree that 'investors
regard dividend changes as signals about a firm's future prospects' and 88%
of respondents express agreement with the statement 'investors use dividend
announcements as information to assess a firm's stock value.' Sixty percent
of the respondents also agree with the statement 'the market rewards
unexpected increases in dividends,' while only 55.5% believe that the market
punishes an unexpected decline in dividends. In line with these views 83% of
respondents express agreement with the notion that 'a firm should adequately
disclose to investors its reasons for changing dividend policy.' However, 72%
agree 'dividend increases are ambiguous because they can suggest future
growth or lack of investment opportunities.' These responses are consistent
with the findings of Brav et al (2003) and Baker and Powell (1999) in their
survey of corporate managers in the USA.
It would appear obvious that the large majority of shareholders in
Barbados have altemative and likely more accurate sources of information
about the prospects ofthe firms they invest in, than the potentially expensive
and ambiguous signals sent by changes in dividends. Thus the notion that
 Dividend Policy Among Publicly Listed Firms In Barbados 29

dividends matter in the valuation of firms in Barbados, because of their

information content, is in the author's view a rather contentious one. The
discussions in the interviews suggest that while financial managers believe
that dividends provide investors with information about the fmancial well-being
of the firm, they do not see dividend payout policy as an expensive signal that
can be used to correct information asymmetry. Therefore, while financial
managers in Barbados appear to believe that dividend policy is an important
source of information for investors, they do not appear to subscribe to dividend
policy being a signaling device in the academic sense.''' This finding is similar
to Brav et al (2003) who find little support for both the assumptions and
predictions of signaling theories that are designed to explain dividend policy, at
least not in terms of the conscious decisions executives make about dividend
policy.

The Tax-Preference Explanation

Four statements on the survey address the tax-preference explanation for

dividend relevance. The responses to the statements can be classified as
ambiguous or mixed. While 94% of the respondents agree that 'a firm should
be responsive to the dividend preferences of its shareholders,' and 72% agree
that 'investors are attracted to firms that have dividend policies appropriate to
that investors' particular tax circumstances,' 83% disagree that 'investors
prefer that a firm retain funds over paying dividends because of the way
capital gains are taxed as compared with dividends' and 72% disagree that
'stocks that pay high (low) dividends attract investors in low (high) tax
brackets.' These responses are similar to the fmdings of Baker and Powell
(1999) and Brav et al (2003) in their surveys of corporate managers in the
U.S.A. In Barbados, capital gains are not taxed while dividends are taxed at
12.5%, which gives a potential tax advantage to capital gains relative to cash
dividends. Along the lines of Brav et al (2003) one can interpret the responses
of corporate managers in Barbados to be suggesting that while they are aware
of the tax disadvantages of dividends relative to capital gains, they believe that
tax concerns are second order concerns for investors, relative to their desire
for cash dividends.

'"•The author tried to spell out the academic view of signalling to the managers and
they expressed strong disagreement with that view.
30 Journal of Eastern Caribbean Studies

The Agency Explanation

The survey contains two statements that provide an agency explanation for
paying cash dividends. The majority of respondents provide little support for
an agency explanation. This is, in the view ofthe author, not surprising given
the ownership structure of publicly listed firms in Barbados. Major shareholders
in publicly listedfirmsin Barbados often enjoy potentially powerful monitoring
rules due to their presence on the Board of Directors which creates little
incentive for the use of alternative monitoring devices. Again, one should
note that the responses provide little support for both the assumptions and
predictions of one ofthe leading academic theories of dividend policy.

Setting Dividend Payments

In terms ofthe manner in which corporate managers go about setting dividend

payments, Lintner's (1956) paper remains the most authoritative study to date.
There are two key results from Lintner's (1956) study. Firstly, the starting
point for most payout decisions was the payout ratio (dividends as a percentage
of earnings) and secondly corporate dividend decisions were made very
conservatively, especially reflected in the reluctance of management to cut
dividends.
The Lintner model has been tested and re-tested over the years in a
range of countries and while the model has proven to be a robust one in
describing dividend policy among developed countryfirms,the results in terms
of dividend policy among developing country firms have been somewhat mixed.
Table 6 presents the results ofthe estimation ofthe Lintner model for publicly
listed firms in Barbados. The results therefore suggest that publicly traded
firms in Barbados engage in a dividend smoothing and follow stable dividend
policies along the lines suggested by Lintner. The responses to the survey
questions and subsequent interview, however, appear to provide a richer view
of the dynamics of setting dividend payments in Barbados. The responses
from corporate managers in Barbados suggest that unlike the postulations of
the Lintner model, the payout ratio might not be the starting point for payout
decisions. While 76.4% of respondents agree that a firm should have a target
dividend payout and gradually work towards it, 66% ofthe firms had no target
or afiexibletarget range while only one firm reported a strict target range and
94% agree that the market places greater value on stable dividends than
stable dividend payouts. In the subsequent interviews, the majority of financial
 Dividend Policy Among Publicly Listed Firms In Barbados 31

managers generally agree that they in fact target the DPS rather than a payout
ratio.
These responses and views in Barbados, contrast with those of Baker
and Powell (1999) but are consistent with those of Brav et al (2003) in their
surveys of corporate managers in the USA. Brav et al (2003) report that
corporate managers in the USA appear to have changed this aspect of setting
dividend payments compared to the time of Lintner's (1956), in that the dividend
per share instead of the payout ratio appears to be the variable now targeted
by corporate managers in the U.S.A.
However, the survey responses do appear to confirm a belief in dividend
conservatism along the lines of Lintner (1956). Ninety-four percent of
respondents agree that "the market places a greater value on stable dividends
than stable payout ratios," 88% of respondents agree that 'a firm should avoid
changing its regular dividend if that change might have to be reversed in a
year or so,' and 94% agree that 'a firm should strive to maintain an uninterrupted
record of dividend payments.' These responses are consistent with the findings
of Baker and Powell (1999) and Brav et al (2003). It thus appears that
Lintner's notion of a sticky dividend policy is relevant in Barbados, but unlike
Lintner's postulation, the variable targeted appears to be the DPS rather than
the dividend payout.

Summary and Conclusion

This paper seeks to add to the nascent literature on corporate financial

management in developing countries by undertaking an in-depth study of
dividend policy among publicly traded firms in Barbados. The paper utilises
historical fmancial data on dividend payments in Barbados over the period
1985 to 2001 along with a questionnaire survey and interviews of financial
managers in Barbados. The paper finds that all publicly listed firms in Barbados
pay dividends and are committed to continue such, and none of the firms have
utilised share repurchases as a means of returning cash to shareholders. While
this is partly explained by the legal limitations on the
extent of share repurchases, given the increased popularity of share repurchases
in a number of markets with similar restrictions, the phenomenon of
'disappearing dividends' does not appear to have yet spread to publicly traded
firms in Barbados.
The paper also finds that like their counterparts in developed markets,
corporate managers in Barbados believe that dividend policy affects the value
32 Journal of Eastern Caribbean Studies

of the firm. However, corporate managers in Barbados tend to favour the

'bird-in-the-hand' explanation for dividend relevance while corporate
managers in the developed markets tend to favor signaling and agency costs
explanations for dividend relevance. Finally, the paper finds that while
corporate managers in Barbados exhibit conservatism in their dividend
policies, especially in the form of a strong reluctance to cut or omit dividends
along the lines suggested by Lintner, they depart from Lintner (1956) in that
the dividend payout ratio does not appear to be the variable targeted when
setting dividend policy. This is similar to the views expressed by corporate
managers in the developed markets.
The research findings therefore suggest that fmancial managers in
Barbados depart fi-om their developed country counterparts in terms of their
strong commitment to paying dividends and a tendency to favour the 'bird-
in-the-hand' explanation for dividend relevance. It is the author's contention
that these differences stem primarily fi-om differences in the ownership and
the corporate govemance structure of Barbadian firms and, to a lesser extent,
the stock market microstructure in Barbados as compared to the USA.
The perpetuation of closely held firms tends to lead to thin trading (and
possibly retards the development of the market microstructure) and a
consequent difficulty in realising capital gains in the absence of major
corporate restructurings, making dividends the main means of generating
cash fi-om an investment in stocks in Barbados thereby fostering a 'bird-in-
the-hand' view of dividends. Also, the fact that major shareholders are
often present as members of the board of the companies they invest in and
enjoy close personal and business relationships with these key personnel of
these firms, serves to reduce information and agency costs and a need for
alternative monitoring devices.

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Science: Finance, Vol.9, (North-Holland, Amsterdam/
Allen, Franklin, A.Berbardo and I. Welch, 2000, A Theory of Dividends Based on
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