The aim of the proposed study is to examine the impact of a dividend policy on the financial performance and value of US firms over the 2013-2023 period. Panel regression methods will be used to assess the relationships between dividends and performance and dividends and value, as well as how these relationships have been impacted by the COVID-19 pandemic. Findings from the study should provide insight on managers’ decision-making on dividend policy. This may help inform decision-making, in particular during periods of economic crises.
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Dividend policy has been a controversial topic in corporate finance literature (Baker et al., 2002). Several key approaches exist to explain firms’ dividend policies, but there appears to be no consensus on which model is the most accurate (Al-Najjar and Kilincarslan, 2019). Managers’ decision-making regarding dividends could be driven by behavioural and signalling aspects, potentially resulting in suboptimal allocation of resources (Baker and Weigand, 2015). This gains relevance during economic crises, as firms in financial distress may seek to avoid cutting dividends to signal better performance (Cejnek et al., 2021). These considerations make the dividend puzzle particularly relevant in the context of the recent COVID-19 pandemic, justifying the focus of the proposed study on this topic.
The aim of the proposed study is to examine the impact of dividend policy on the financial performance and value of US firms over the 2013-2023 period. This will be achieved by following four objectives:
Miller and Modigliani (1961) suggested that dividend policy should not affect firm value. Shareholders’ wealth is influenced by profits generated from investment decisions. As long as income distribution does not affect investment decisions, there should be no link between dividend policy and earning power (Baker and Weigand, 2015). The tax preference hypothesis allows capital gains and dividends to have different tax treatment (Baker et al., 2002). If investors seek to maximise after-tax returns, then capital gains would be preferable due to the tax rate differential with dividends. Furthermore, capital gains allow for deferring tax payments until the shares are sold (Baker and Weigand, 2015). As such, shareholders may choose to pay a premium for a stock that pays out a lower dividend rate.
A related framework is that of the clientele effect, which hypothesises that market imperfections such as taxes and transaction costs impact investors’ preferences and decision-making (Brigham and Ehrhardt, 2013). Since shareholders would seek to minimise transaction costs, stocks with higher dividends should be more attractive (Bhattacharyya, 2007). These considerations may become especially relevant during economic crises, as investors may interpret maintaining the pre-crisis dividend policy as a sign of stability and favourable prospects (Cejnek et al., 2021; Ali et al., 2022).
The signalling hypothesis posits that changes to paid dividends could reflect information that is only available to managers (Shapiro and Zhuang, 2015). In this case, investors might interpret a new dividend policy as a signal related to the firm’s future prospects. The agency theory is based on the inherent conflict of interest between investors and managers (Jensen and Meckling, 1976). Agents are interested in engaging in actions that may waste firm resources. Paying dividends may reduce available discretionary funds, limiting agents’ opportunities to act out of self-interest (Baker et al., 2002).
Based on the above considerations, the following hypotheses are proposed:
Hypothesis H1: Dividend policy positively influences the financial performance of US firms in 2013-2023;
Hypothesis H2: Dividend policy positively influences the firm value of US firms in 2013-2023;
Hypothesis H3: The COVID-19 pandemic has a positive influence on the relationship between dividend policy and the financial performance of US firms in 2013-2023;
Hypothesis H4: The COVID-19 pandemic has a positive influence on the relationship between dividend policy and the firm value of US firms in 2013-2023.
The proposed study will adopt a positivist approach to research, which emphasises the role of knowledge acquired through unbiased analysis and interpretation of evidence and data (Saunders et al., 2015). The study will employ quantitative methods of research to analyse secondary data, which should enhance the study’s validity and replicability by minimising subjective bias (Creswell and Creswell, 2018).
The study will utilise panel regression techniques to investigate annual firm-level data. Panel data analysis potentially offers greater internal validity over a simpler cross-sectional or time-series design (Greene, 2017). The sample will cover public US firms over the period from 2013 to 2023. Firm-level data will be obtained using the Refinitiv Eikon service (Refinitiv, 2024).
The following general form of the empirical model will be considered:
The variables are as follows: is a measure of firm performance or firm value (ROA, ROE, annual stock return) of firm in year ; represents dividend policy (dividend payout ratio); is a vector of control variables, including firm size, leverage, liquidity, and growth. Hypotheses H1 and H2 correspond to the regression coefficient in Equation 1 for performance and firm value dependent variables, respectively.
In addition, an extended model is considered to examine the effect of the COVID-19 pandemic:
Here, is a dummy variable taking the value of 1 for years associated with the pandemic, and 0 otherwise. Hypotheses H3 and H4 correspond to the interaction coefficient in Equation 2 for performance and firm value dependent variables, respectively. Panel regression estimation will be conducted using Stata software. Statistical tests will be used to choose the most appropriate specification and assess validity of the model. In particular, this will include the Hausman specification test and residuals tests for heteroskedasticity and autocorrelation (Wooldridge, 2015).
The results from the study should provide insight on firms’ decision-making with regards to dividend policy. This should allow for understanding which theoretical framework most accurately describes managers’ decisions. In addition, the study will produce findings on the moderating effect of COVID on these relationships. These findings could help inform decision-making in periods of economic crises, as they may indirectly reflect changes in investors’ perceptions in an economically unfavourable environment.
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