Review of Accounting Studies

, Volume 1, Issue 2, pp 141–160 | Cite as

Dividend policy and permanence of earnings

  • Roger Kormendi
  • Paul Zarowin


We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not.

Using a sample of 337 firms over the 40 year period from 1950–1989, we find the data to be strongly consistent with the permanent earnings model. We also find that the data are more consistent with a model that relates dividend and earnings changes rather than levels. Thus, we conclude that earnings and dividends are not co-integrated. This contrasts with the implicitly co-integrated (levels) dividend model of Lintner (1956), and indicates that factors other than the permanent component of earnings, such as tax policy, clientele effects, transaction costs, etc. may have a significant impact on the long-run behavior of dividends.


Forecast Error Firm Sample Dividend Payout Dividend Policy Earning Change 
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Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Roger Kormendi
    • 1
  • Paul Zarowin
    • 2
  1. 1.The University of MichiganUSA
  2. 2.Leonard N. Stern School of BusinessNew York UniversityNew York

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