Dividend Policy Determinants

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DIVIDEND POLICY DETERMINANTS: AN INVESTIGATION OF THE INFLUENCES OF STAKEHOLDER THEORY by Mark E. Holder, Frederick W. Langrehr, J. Lawrence Hexter There is considerable debate on how dividend policy affects firm value. Some researchers believe that dividends increase shareholder wealth (Gordon, 1959), others believe that dividends are irrelevant (Miller and Scholes, 1978), and still others believe that dividends decrease shareholder wealth (Litzenberger and Ramaswamy, 1979). Financial management research on financing policy decisions, including the dividend decision, considers investment as an exogenous variable, or at least as having a fixed, known distribution. However, recent research (Cornell and Shapiro, 1987; Peterson and Benesh, 1983; Prezas, 1988; and Ravid, 1988) suggests that there are interactions between investment and financing decisions. Cornell and Shapiro (1987) posit that non-investor stakeholders (customers, employees, suppliers, distributors, and other firms providing complementary goods and services) influence this interaction of investment and financing decisions. We investigate the influence of these stakeholders on firms' dividend policy by examining the interaction between the dividend and investment policies. We propose that both non-investor stakeholders and capital suppliers have an impact on a firm's dividend policy. To test this proposition, we use a more direct measure of free cash flow as a way to relate dividends and agency costs and an objective smoothing procedure on the dividend-payout ratios. Our results indicate that an interaction between the dividend and investment policies of a firm does exist. This paper is divided into five parts. In Section I, we review the related literature and provide background information on stakeholder theory and dividend policy. In Section II, we discuss our empirical model, followed by a sample description in Section III. We report our empirical results in Section IV. The final section discusses...
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