Abstract
Dividend policy theories have been extensively studied by academics and practitioners, from the irrelevance theory of Miller and Modigliani (J Bus 34(4):411–433, 1961) to other complementary or conflicting theories. This paper aims to understand which dividend policies theories drive the distribution of dividends for listed companies traded on the main European markets. Through an OLS regression model, we study the determinants of dividend payments for companies included in nine European stock market indexes for the period 2001–14 (panel data). The results of the analyses suggest that there are still many drivers of companies’ dividend policies, confirming the Black’s “dividend puzzle” (J Portf Manag 2(2):5–8, 1976). Whilst the agency cost theory does not explain European dividend policy, we provide evidence that pecking order theory, signaling theory, and bird-in-the-hand theory complementarily explain dividends’ payments.
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- 1.
The assumptions of a perfect capital market necessary for the dividend irrelevancy hypothesis can be summarized as follows: (i) no differences between taxes on dividends and capital gains; (ii) no transaction and flotation costs incurred when securities are traded; (iii) symmetrical and costless information for all market participants; (iv) no agency problem; and (v) all participants in the market are price takers. Under these assumptions the valuation of all shares would be governed by the following fundamental principle: the price of each share must be such that the rate of return (dividends plus capital gains per dollar invested) on every share will be the same throughout the market over any given interval of time. Relaxing one or more of the assumptions of perfect capital markets and introducing market imperfections dividend decision becomes relevant and interact with other decisions made by the company about investment and financing.
- 2.
Miller and Modigliani (1961) stated that “(…) given a firm’s investment policy, the dividend payout policy it chooses to follow will affect neither the current price of its shares nor the total returns to shareholders”.
- 3.
Obviously, these items depend on the specific assumptions of the model and may not follow in other contexts.
- 4.
Graham and Dodd (1934) argued that a dollar of dividends has, on average, four times the impact on stock prices as a dollar of retained earnings.
- 5.
Miller and Modigliani (1961) called this argument the “bird-in-the-hand fallacy”.
- 6.
The BEL20 is the main stock market index of the Belgian stock exchange Euronext Brussels. It is composed by a minimum of 10 to a maximum of 20 blue-chip companies, following the ICB.
The CAC 40 is the primary benchmark stock market index of the French stock exchange Euronext Paris. It is an Industry Classification Benchmark (ICB) index that tracks the segment of the 40 largest and most actively traded shares listed on Euronext Paris.
The DAX reflects the performance of the 30 largest and most liquid companies on the German stock exchange Deutsche Börse. Following the DGB classification standard, the DAX is diversified across sectors such as automotive, chemicals, banking and industrials and covers about 80% of the aggregated prime standard’s market cap, and is thus an established indicator for the performance of the German economy as a whole.
The FTSE 100 is one of the world’s most recognized stock market indexes and accounts for 7.8% of the world’s equity market capitalization. It is the main stock market index of the London Stock Exchange (LSE) and represents the performance of the 100 largest UK listed blue-chip companies which meet FTSE’s size and liquidity screening, providing a global measure that spans far beyond the UK economy.
The FTSE MIB is the main stock market index of the Italian stock exchange Borsa Italiana, part of the London Stock Exchange Group. The index comprises the 40 highest liquid, leading companies in Italy, deriving from the stocks traded on the Borsa Italiana MTA and MIV markets. It follows the Global Industry Classification Standard (GICS) and seeks to replicate the broad sector weights of the Italian stock market.
The IBEX 35 is the key stock market index designed to represent real-time evolution of the most liquid stock in the Spanish Stock Exchange Bolsa y Mercados Espanoles (BME), composed by the 35 most liquid securities listed on the Spanish Stock Exchange Interconnection System market segment of the Joint Stock Exchange System for the four Spanish Stock Exchanges called Main Trading Market.
The Nasdaq Stockholm OMX 30 (OMXS 30) is the main stock market index of the Swedish stock exchange Nasdaq OMX Stockholm (Stockholmsbörsen). It is composed by 30 blue-chip companies, following the ICB.
The PSI 20 is a stock market index that reflects the performance of the maximal 20 most actively traded shares listed on Euronext Lisbon. It covers the Blue-chip tradable companies, and is the most widely used indicator of the Portuguese stock market.
The Swiss Market Index (SMI) is the main stock market index of the Swiss stock exchange Six Swiss Exchange, composed by the 20 largest and most liquid stocks. It represents about 85% of the free-float capitalization of the Swiss equity market (Federation of European Security Exchanges 2015).
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Chesini, G., Giaretta, E. (2016). The Drivers of Dividend Policies in Europe. In: Carbó Valverde, S., Cuadros Solas, P., Rodríguez Fernández, F. (eds) Bank Funding, Financial Instruments and Decision-Making in the Banking Industry. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-30701-5_9
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