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An investigation of the dividend decision : with emphasis on the Canadian situation Copeland, Curtis Joseph 1968

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AN INVESTIGATION DECISION,  OF T H E D I V I D E N D '  WITH E M P H A S I S  CANADIAN  ON T H E  SITUATION  by 1  B.S.F.,  CURTIS  JOSEPH  COPELAND  University, of.British Columbia,  1964  A T H E S I S S U B M I T T E D IN P A R T I A L F U L F I L M E N T OF THE REQUIREMENTS  FOR T H E D E G R E E OF  M A S T E R OF BUSINESS  i n the , Commerce  ADMINISTRATION  Faculty  of  and B u s i n e s s  Administration  We a c c e p t t h i s t h e s i s as c o n f o r m i n g required  to  the  standard  T H E U N I V E R S I T Y OF BRITISH April ,  1968  COLUMBIA  In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l of the  r e q u i r e m e n t s f o r an a d v a n c e d  versity  d e g r e e at the  of B r i t i s h C o l u m b i a , I a g r e e t h a t the  s h a l l make it f r e e l y I further  available  for  extensive  s c h o l a r l y p u r p o s e s m a y be  H e a d of my D e p a r t m e n t o r by h i s  Uni-  Library  f o r r e f e r e n c e and  a g r e e that p e r m i s s i o n  of t h i s t h e s i s f o r by the  fulfilment  study.  copying granted  representatives.  It i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d my w r i t t e n  permission.  F a c u l t y of C o m m e r c e  and B u s i n e s s  Administration  T h e U n i v e r s i t y of B r i t i s h C o l u m b i a . :  Vancouver  April  without  8,  ,1968  Canada.  ABSTRACT The the  objective  of t h i s t h e s i s  n u m e r o u s a s p e c t s of t h e  e m p h a s i s on  the  decision  three areas  criteria  date t h e s e p r o b l e m  the  an  f i r m , and  are  matic implications t h e o r e t i c a l and ship  sions  on  extend  no  Modigliani b e a r i n g on  of) the  and  eluci-  to  chapter  on  available  and  contributions.  esta-  to  of c a p i t a l o r  to  prag-  pertinent, The  relation-  traditional  alternative proposals follow.  a p p r o a c h that  pro-  theory are  described.  to be  in  studies.  m a k i n g and  is first  the  is first  explained  subsequent  decision  and'Miller cost  new  to  decision  economy  a d h e r e n c e to t h e o r y i s s u g g e s t e d The  are  ( a l s o , to e x a m i n e t h e  empirical  and  dividend the  of t h e  capital -structure  thereof  amount  in this thesis  then e x a m i n e d  between dividend  theory  dividends,  i n i n t e r - i n d u s t r y r a t i o s and  objectives  sort-,- r e l a t e , a n d  towards  de-  w o r k . B o t h o l d and  utilized  e n v i r o n m e n t f o r the The  with  areas.  blished.'-Variations payout trends  decision  to e s t a b l i s h t h e  i m p o r t a n c e of t h e  shareholder,  vide  attitudes  requiring further  unique approaches are  The  dividend  investigate  Canadian situation. Theoretical  velopments, investors' and  i s to  ExtenStrict  impractical. dividends  share price  and  have  are  . iii t h e r e f o r e not  important  1) l o g i c a l l y criticisms  a r r a n g i n g , and  of t h e i r - c o s t  2) e x a m i n i n g , the  early theory  are  determined  of c a p i t a l  results  by  (unlevered  of t h e p u b l i s h e d  equity)  stream;  statistical earnings  is correct;  the  detail  of (1) i n f o r m a t i o n a l c o n t e n t s  link between a change in dividends s h a r e ' p r i c e and  (2). t h e  observation  and  l e n g t h of t i m e  d e n d c h a n g e s i s s u b s t a n t i a t e d by and  the l o g i c  pre-  authors.  importance  studies  validating  a dividend  4) e x a m i n i n g i n g r e a t e r  The  argument;  c o n s o l i d a t i n g , and  capitalizing  from,  n o n e of w h i c h i n d i c a t e t h a t t h e p u r e  hypothesis  sented  by: concluding  that s t o c k v a l u e s by  3) c i t i n g studies,  is refuted  as  a  a change in following divi-  a n a l y s i s of  three  of c o m p a n i e s i n v o l v e d i n  those  studies. To  determine  C a n a d i a n i n v e s t o r s ' a t t i t u d e s to  d i v i d e n d s , f o u r s t u d i e s , each u s i n g p a i r e d data to 1 9 6 5 )  from  undertaken. cial  up  Firms  similarity,  rence  to 144  Canadian companies,  w e r e p a i r e d on  especially  to s e t a p a r t  dividends  the p r i c e - e a r n i n g s r a t i o . paired  The  as  payout  other  comparative  finandiffe-  a factor influencing study  using very  stocks wasdeemed most s i g n i f i c a n t  •g-rowth a n d  were  t h e b a s i s of  g r o w t h , and  (1961  measures  closely  because are  almost  iv completely investors policy  isolated. are  The  rational  (that i s , they  retains  earnings  demonstrated firms  may  i n the  long-run  increase  The  the  of a c o m p a n y  those  their  dividend.  d i s c r e t i o n a r y elements are  and  of t h e  g u e s t i o n n a i r e , sent  and  sales are  and: a n t i c i p a t e d n e e d f o r  g r o w t h and  existence  to q u e s t i o n s  features  on  put  fifty  (1) t h e  Lintner's  classic  i n the f o r m  appropriate  earnings competitors' impor-  existence  dividend  of a  decision, as  well  and as  further  procedure.. dividend  c r i t i c i z e d to e s t a b l i s h , results,  cash,  respondents, provide  decision  net  least  of a s o u n d p o l i c y ,  i n t o the  questionnaire are  on  primary  a d d i t i o n a l c o m m e n t s by  and  in  of c o n t r o l g r o u p s ,  p a y o u t , (2) t h e  (3) i m p o r t a n t  variability  pre-  dividends,  considered, most important;  Answers  mined  to  of C a n a d i a n c o m p a n i e s , s h o w t h a t (1)  (5) e x p e c t e d  insight  stock  Legal  and  target  is  (2) t h a t c e r t a i n g r o w t h  (3.) p l a n n e d i n v e s t m e n t p r o j e c t s , (4) p a s t  tant.  that  earnings  m a r k e t p r i c e of t h e i r  lowering  p r o f i t , ;(2) p r e s e n t  p a y o u t and  dividend  d e c i s i o n in p r a c t i c e i s then i n -  Results  directors  r e t u r n on  that  dividend  vestigated. sented.  desire shares  h i g h ) and  by  i n d i c a t e (1)  i n t h e i r a t t i t u d e to  i f the  to be  results  three  m o d e l i s then w i t h the  dividend  C a n a d i a n data  in order  a i d of  models  of r e g r e s s i o n e q u a t i o n s  exathe  which  and  tested  to e l u c i d a t e  the  V  decision profits  process.  Subsequent analyses  and company  significant; depreciation fluence;  size are consistently  long-term show  less  debt, future consistent  and  prospects,  that highly and  but s i g n i f i c a n t i n -  i n v e s t m e n t and c a s h - n e e d v a r i a b l e s  s i g n i f i c a n t ; d e g r e e of l i q u i d i t y no  indicate  are less  and c o n s e r v a t i s m  show  relationship. The dividend  l e v e l of a g g r e g a t e  decision economics  of a g g r e g a t e v a r i a b l e s ,  i s then e x a m i n e d to consider  the i m p a c t  and i n c o n j u n c t i o n with  government macro-economic  policy. This  tion s u p p o r t s the q u e s t i o n n a i r e  at the  these,  investiga-  conclusions.  T'ABLE OF C O N T E N T S CHAPTER I.  PAGE  . INTRODUCTION  1  Objectives  1  . . .  Methodology. II. III.  . -.  -5  I M P O R T A N C E OF DIVIDENDS  8  DIVIDEND PATTERNS  13  A n a l y s i s of C a n a d i a n T r e n d s  . . . . . . .  American Trends Industry P a t t e r n s . IV.  13 15  . . .•  17  T H E O R E T I C A L AND E M P I R I C A L CONTRIBUTIONS  21  Dividend D e c i s i o n in P e r s p e c t i v e  . . . .  F i n a n c i a l r e l a t i o n s h i p in theory  . . .  21 21  E x t e n s i o n s of the b a s i c t h e o r y on dividend decisions .  26  Real world relevance A different approach  26 . .•  28  D i v i d e n d s m a t t e r v i a the optimum, c a p i t a l structure theory Earnings Versus Dividends  , . . . .  30 34  Theory/  34  Empirical results.  42  viii CHAPTER  PAGE Mille r - M o d i g l i a n i Hypothesis I m p o r t a n c e of I n f o r m a t i o n a l  49 Contents  . .  Soganich  55  Ashley... Barker. V.  55  . . . . ...  THE CANADIAN  56  .  58  INVESTORS'  R E A C T I O N TO D I V I D E N D S  60  Purpo s e . .  60  Method  60  . . . . •  Results  65  D i s c u s s i o n ' of R e s u l t s  . . .•  71  C r i t i q u e - of M e t h o d . . . VI. . DIVIDEND  DECISION  Constraints  76  IN P R A C T I C E  . . . .  . . . . -  80  D i s c r e tio'na r y ^C ons i d e r a t i o n s  82  !  Lintne r  82  T h o m p s o n and W a l s h Questionnaire  •.  87  The L i n t n e r D i v i d e n d M o d e l . D e v e l o p m e n t and r e s u l t s  104 .  104  C r i t i c i s ms  106  ' Dividend Models Applied  Purpose.  85  to C a n a d i a n  companies  Canadian Data  80  to  .  I l l . .  I l l  ix  CHAPTER  PAGE Dhrymes  and'Kurz  112  Initialmodel  VII.  .  Intermediate model  123  Final model  126  Comments  130  A G G R E G A T E ECONOMICS AND' T H E DIVIDEND DECISION  VIII.  . . . . . . . . . . .  CONCLUSIONS.......  BIBLIOGRAPHY  . . . .'  150 in  Canada  and i n the U n i t e d S t a t e s  '  A P P E N DIX B . . Histogram..Showing Payout 190 C a n a d i a n  APPENDIX  Firms,  C. Histograms  by I n d u s t r y ,  157 Ratios  1-9 61 to 1965 Showing Payout  1961 to 1965  APPENDIX D. Payout-Ratios Size Canadian  161 Ratios  . . .'  163  for. D i f f e r e n t  F i r m s , 195 1- 1962  169  A P P E N D I X E . Paired Companies APPENDIX  F . C o p i e s of the  Requesting  Cooperation  131 145  A P P E N D I X A . Dividend Trends  of  115  (1) T w o  171 Letters  and (2) A c c o m p a n y i n g  Questionnaires A P P E N D I X G . F i r m s U s e d f o r M o d e l ' T e s t i n g . .'  17.7 182.  L I S T 'OF  TABLES  TABLE I.'  PAGE D i v i d e n d s R e c e i v e d by I n c o m e Class in Canada,  II.  Average  Payout  to  1964 Common  Shareholders from Canadian •Period III.  Results  Results  Major  Industries in  the  1961 to 1965  18  of P a i r i n g 144  Tabulated IV.  9  Companies  by I n d u s t r y  of P a i r i n g 56  67  Companies  Exhibiting Exceptional G r o w t h . V.  Results  of V e r y C l o s e l y  . . .' .  Pairing  54 C o m p a n i e s VI.  Results  69  of P a i r i n g 48  Each Company  VII.  Difference cent  How 195 A m e r i c a n R a n k e d the  Companies,  within a Pair  Having a Payout of O v e r 35 P e r  70  Companies  R e l a t i v e -Importance  of C o n t i n u i t y ,  Rate  Stability,  and S i z e of D i v i d e n d VIII.  68  85  I m p o r t a n c e of F a c t o r s i n the D e c i s i o n for a.Randomly G r o u p of 20 C a n a d i a n with T o t a l Assets  Dividend Selected  Companies,  Over  Each  10 M i l l i o n D o l l a r s 92  xi  TABLE IX.  PAGE I m p o r t a n c e of F a c t o r s  in  the-Dividend  D e c i s i o n f o r 10 C a n a d i a n i n the X.  Forest  Importance  Products  of F a c t o r s  Industry  i n the  D e c i s i o n f o r .8 C a n a d i a n in the XI.  Food  Companies ....  Dividend  Companies  Industry  N u m b e r of F i r m s  . . .  .with and  XIII.  95  C a n a d i a n D i r e c t o r s ' R a n k i n g of Continuity, Directors'  and  Opinion  Stability on  XIV.  the  Whether  Forest  Intermediate Firms  XVI.  Decision  Taxes First  Forest  S a l e s and  i n C a n a d a , by Half  1966  and  the Amount 98  Firms 1964  Model Applied  i n the  Corporation  Industry,  97  . .  I n i t i a l M o d e l A p p l i e d to 25 i n the  XV.  Primary  Size,  .  N e e d to C h a n g e t h e D i v i d e n d is  94  without  a Target' Payout Ratio X.II.  93  to  119 25  Industry, Profits  1964  . .  125  after  Industry, 1967  137  LIST OF FIGURE 1.  FIGURES  . Relationship  PAGE  b e t w e e n the  Dividend  D e c i s i o n and O t h e r - V a r i a b l e s 2.  Dividend Decision in Theory  3.  Profits  v e r s u s Gash  i n the  . . . . . . .  F l o w s as  D e t e r m i n a n t - of the  3 24  a  Dividend- D e c i s i o n  United States,  1957  to  1966  . . .  110  4.  Initial Model . -  11-5  5.  Intermediate Model  123  6.  S t r u c t u r e of the  Dividend  in .Canada B a s e d  on 33  Decision Directors'  Stated 0pinions 7.  F i n a l .Model  8.  Gross  127 128  National Product  1960 to  Increases,  1966; G o v e r n m e n t  Estimated  Inc r e a s e , 1 9 6 7 ( w i t h A d j u s t m e n t Price 9.  Changes)  135  I n c r e a s e s in Company 1963 to  10.  for  Profits,  1966  13 6  Annual P e r c e n t a g e Changes in Manufacturing  Industry's  Expenditures (Current 1964 to  1966;  Change , 1 9 6 7  the  Capital  Dollars),  Government  Estimated • . . .  138  xiii FIGURE 11.  PAGE G o v e r n m e n t . Budget., Government  195 6 to  Estimated  1967 and 1968  1966;  Budget, 142  ACKNOWLEDGEMENTS This criticisms Dr.  study was a p p r e c i a b l y i m p r o v e d a n d s u g g e s t i o n s of D r . P. A.  H..L. P u r d y ,  writer  expresses  corporation opinions  and'.Mr, W. hisgratitude  who h e l p e d i n s u n d r y  ways,.  Lusztig,  F. J . W o o d . T h e to t h e s e m e n , to t h e  e x e c u t i v e s who t o o k t i m e  on the .subject u n d e r  byt h e '  to g i v e  their  s t u d y , a n d to t h e o t h e r s  CHAPTER  I  INTRODUCTION I. :  The  s i o n and  major  to be  in  Figure  by  consensus'or  and  1.  related  to' t h e  dividend  discussed'in this thesis  are  c o m p r o m i s e , ho.w elements  should  i n l i g h t of t h e g e n e r a l  policy  of s h a r e  the  deci-  depicted  s h o w n , the c o m p a n y d i r e c t o r s  decide,  cert.ain c o n s t r a i n t s ;  be  considered  economic  t h e n a t u r e - of t h e . f i r m . T h e ' b o a r d o f  represents jor  areas  discretionary  synthesized and  As  OBJECTIVES  company's shareholders  and  climate  directors  and  makes  ma-  d e c i s i o n s o n - t h e i r b e h a l f . -A.s' m - a x i m i z a t i o n  price  is a primary  o b j e c t i v e of  management,  -'-This goal although accepted by most i s debated.by many. F o r the arguments of a dissenter see: R. N. Anthony, "The Trouble with Profit Maximization," Harvard Business Review, v o l . 38 (NovemberDecember 1960), pp. 126-134. F o r the arguments of-, a' supporter see: N. R. Greene, "How Much Responsibility Does Management Have for • the P r i c e L e v e l of the Company's Stock. " Readings in Financial Analysis and Investment Management, ed. E. M. L e r n e r , Homewood, Illinois, Richard D. i r w i n , Inc. ,~T9~63, pp. 212-215. F o r a perceptive article on the differences between management and shareholders' objectives see: G. Donaldson, "Financial Goals: Management vs. Stockholders," Harvard Business Review, v o l . 41 (May-June 1963), pp. 116-129; also, C..T7 Potter, Finance 'and Business Administration i n Canada, Scarborough, - ' Ont. , P r entice-HaTToTTJanada L t d . , 1U66, pp7362-363. The goal of maximization of share price is often more specifically stated as maximization of the present value of the owners' wealth, including both price appreciation and dividends. F o r example, see: J . T. S. P o r t e r f i e l d , Investment Decisions and Capital Costs, Englewood C l i f f s , N. J . , P r e n t i c e - H a i l , M c , iy65,~pp. 85-87.~~~~  2 o w n e r s ' and price.) a r e  investors' attitudes (which affect share important  • Economic to t h e  and  to d i v i d e n d p o l i c y . financial theory  s t a g e w h e r e a l l the  perfectly  and  has  systematically incorporated a precise, optimum  theless,  has  be  such theory  information. h e e d e d by  These  the  evolve  r e l e v a n t v a r i a b l e s can  s i o n p r o c e s s ..to g i v e  tic  y e t to  provided  be  i n t o the dividend.  valuable  and  in their  None-  pragma-  developments , therefore ,  decision-makers  deci-  attempt  should to  optimize'. The" d i v i d e n d M i c r o - ef f e c t s a r e holders. affects has  an  Corporate  d e c i s i o n has  r e f l e c t e d i n th'e a t t i t u d e s of dividend  i n f l u e n c e on  d e c i s i o n and  berate  p o l i c y i n the  economic  p o l i c y or  conditions  the  legislative  and  and  g o v e r n m e n t can  he n e e - . c o r p o r a t e . *  savings  action.  share-  aggregate .  numerous macroecono mic'.variables  ment p o l i c y . C o n v e r s e l y , the  certain consequences.  on  thus governinfluence  through  deli-  Attitudes of shareholders  DIVIDEND DECISION  7K  : f  "7\  Actual' dividend paid  E c o n o m i c and f i n a nc ia1 theory legal Company  Government action  directors  /\ Nature of the.-. f i r m . .  Economic condition:  FIGURE  policy"  1  •RELATIONSHIP B E T W E E N THE DIVIDEND DECISION AND OTHER VARIABLES  Effects •micro macro  c The  overall thesis  c o n t e n t s of F i g u r e  objective  i s t o e x p a n d 'on t4h e  1 by e x a m i n i n g c e r t a i n  c f the' a r e a s  2 r e l a t e d , to t h e d i v i d e n d  decision  with  e m p h a s i s on the  recent Canadian, situation. Specific thesis are:  objectives  ' (1) t o d e s c r i b e b r i e f l y  Figure  1) t h e i m p o r t a n c e (2)  industry  to a n a l y s e patterns  subsequent  (within  t h e c o n t e x t of  of the d i v i d e n d  decision;  a g g r e g a t e t r e n d s a n d to d i s p l a y  to p r o v i d e  an e n v i r o n m e n t f o r the'  studies;  (3) t o r e l a t e t h e t h e o r e t i c a l a n d e m p i r i c a l tributions •  and their  implications;  (4) t o d e t e r m i n e  towards dividends; (.5)  Canadian shareholders' .  by d i r e c t o r s  of C a n a d i a n  (6) to. i n v e s t i g a t e , the' d i v i d e n d s e t t i n g of a g g r e g a t e  attitudes  ;  to i s o l a t e and e x a m i n e t h e i m p o r t a n t  factors-considered  con-  decision  policy  companies; within the  economics.  ; ^ T h e - d i v i d e n d d e c i s i o n i n t h i s - t h e s i s r e f e r s to the p a y m e n t of c o m m o n d i v i d e n d s a f t e r t a x e s a n d p r e ferred dividends. The d e c i s i o n i n v o l v i n g the l a t t e r was e x c l u d e d f r o m t h e s t u d y b e c a u s e of t h e d i f f e r e n t n a t u r e of the p r e f e r r e d d i v i d e n d d e c i s i o n a n d b e c a u s e common stock financing i s more prevalent.  5  II.  METHODOLOGY-  . T h e f o l l o w i n g p a r a g r a p h s o u t l i n e , the logy used i n C h a p t e r s ^  methodo-  II to V I I .  . . • • T h e d e s c r i p t i o n of d i v i d e n d i m p o r t a n c e II) i s c l e a r l y b a s e d  (Chapter  on and i s an e x t e n s i o n of F i g u r e  T he -unde r l y i n g c a u s e s of d i v i d e n d t r e n d s  1.  over  r e l a t i v e l y r e c e n t y e a r s a r e .discu-ss.ed i n c h r o n o l o g i c a l order  (Chapter  III); i n d u s t r y p a t t e r n s are  by g r a p h s , w h i c h a r e  illustrated  p l a c e d i n the. A p p e n d i c e s .  T h e m e t h o d of a p p r o a c h t h e o r e t i c a l dev.elopments  i n the p r e s e n t a t i o n  ( C h a p t e r . I V ) i s the  of  examining  of c e r t a i n c o n t r o v e r s i a l a r e a s by e s t a b l i s h i n g a p o s i tion  and t h e n c o u n t e r i n g o r s t r e n g t h e n i n g  with v a r i o u s other  this  h y p , o t h e s e s and e m p i r i c a l  In t h i s ' w a y , the w o r k s of n u m e r o u s  position results.-  authors are  shown  to be r e l a t e d . . To  determine  Canadian investors'  d i v i d e n d s of c o m p a n i e s in different  in different  reactions  s t a g e s of  i n d u s t r i e s , , and i n the o v e r a l l  to  growth,  market  ( C h a p t e r V ) , an e m p i r i c a l s t u d y i s a p p l i e d to C a n a d i a n • ' ' • ' • ' • 3 d a t a . T h e study, i s p a t t e r n e d a f t e r one by B u r r e l ' and  O . K . B ' u r r e l , ' " R e l a t i v e V a l u e ' of E a r n i n g s : R e t a i n e d and D i s t r i b u t e d , " T h e C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , v o l . .1 8 6- ( J u T y ~ l cT7~rwrr7~pp 7~T~, 2 8 - 2 9  6 •• several  incorporates u t i l i z e s more  i d e a s f r o m one by H a r k a v y ,  e l a b o r a t e p a i r i n g t e c h n i q u e s than 5  4  yet  either.  .  Lintner a n d , m o r e r e c e n t l y , T h o m p s o n and 6 • Walsh have i n v e s t i g a t e d through p o l l i n g t e c h n i q u e s the i m p o r t a n c e r e s u l t s are  of the m a j o r  summarized  policy variables.  (Chapter  VL) a f t e r ' a n  ductof'y 'Section' on l e g i s l a t i v e - a n d c o n t r a c t u a l straints.  T h e f o r m of the q u e s t i o n n a i r e  t h e s i s and se-n't to f i f t y the t e c h n i q u e s , aut.h-.ors . .-In f a c t , tionnaire i n the  Canadian firms  questions,  the m o r e  important  conthis  was b a s e d  on  of t h e s e  one of the., ,ob j e c t i v e s of the  Canadian situation.  intro-  used for  and c o n c l u s i o n s  was t o " t e s t the r e l e v a n c e  Their  of,their  quesconclusions  T h e s i g n i f i c a n c e of s o m e of  policy considerations  s u g g e s t e d by  O s c a r H a r k a v y , "T.he R e l a t i o n B e t w e e n R e t a i n e d E a r n i n g s and Common Stock P r i c e s for L a r g e L i s t e d C o r p o r a t i o n s , " T h e J o u r n a l of F i n a n c e , v o l . V I I I (September-.195377"ppT 290-29~5;. ~ . -. . "5'  J o h n L i n t n e r , '"The D e t e r m i n a n t s of C o r p o r a t e S a v i n g s ' , " S a v i n g s i n the Mo de r n E c o n o m y , e d . W . W . H e l l e r and o t h e r s , ~~MFnneapo l i s , U n i v e r s i t y of M i n n i s o t a P r e s s , 1953, pp. 248- 252; John L i n t n e r , " D i s t r i b u t i o n of I n c o m e of. C o r p o r a t i o n s A m o n g D i v i d e n d s , R e t a i n e d E a r n i n g s and T a x e s , " A m e r i c a n E c ono m i c R e v i e w , P a pe r s and P r o c e e d i n g s , v o l . XT7V T UV1 a y 19 5 WT, p p . 9IT- 9 9 . G . C . . T h o m.p s o n and F . J . W a l s h , J r . , " C o m panies S t r e s s ^Dividend" C o n s i s t e n c y , " Management R e c o r d , N a t i o n a l I n d u s t r i a l C o n f e r e n c e B o a r d " , Inc . , v o l . X 1 T ( J a n u a r y 1963 ) , p p . 3 0 - 3 6 . 6  ;  7 the d i r e c t o r s  was  determined  puter s e v e r a l models and  i n the  mulation and VI and  extended  a d j u s t e d to o v e r c o m e  herent  differs  the m e t h o d  of a n a l y s i s  com-  Lintner studies  are  was  Lintner-  dividend used i n  Lintner's,  final investigation  complement  aggregate  the  the  s o m e of t h e w e a k n e s s e s i n -  criticisms  dends i n the a g g r e g a t e , and  from  i n the e n t i r e  somewhat from  subsequent The  t e s t i n g on  L i n t n e r m o d e l / B e c a u s e the  i s the c l a s s i c  because  by  both  area  Chapter  his  model  presented.  :  VII),  (Chapter  of  divi-  i n t e n d e d t o supplem'-ent,  questionnaire conclusions. Hence, .  data f o r each m a j o r  policy variable  are'  e x a m i n e d - i n r e l a t io n • t o • the r e c e n t t r e n d s i n Tremendous  s c o p e and  complexities precluded  m i n a t i o n of t h e - i m p a c t  sistency  on  the s c h e m a t i c  John B r i t t a i n ' s  7  '  '  d e n d P o l i c y , ,. h o w e v e r , a n a l y s e s dends and  an  exa-  macroeconomics  has  g o v e r n m e n t p,-olicy-, a l -  is necessary'to  of F i g u r . e 1.  payout.  t h a t the d i v i d e n d d e c i s i o n  on t h e e n t i r e , e c o n o m y a n d though this area  for-  Corporate •'  conD iv i -  .  the s u b j e c t  of.divi-  i n the U n i t e d S t a t e s  eco-  n o m y . . . .  ' J . A . B r it t a i n , C o r p o r a t e D i v i d e n d P o l i c y , W a s h i n g t o n , D. C. , .The B r o o k i n g s I n s t i t u t i o n , 1~966, passim.  CHAPTER IMPORTANCE In t h i s c h a p t e r Figure  1 i s extended  OF  II DIVIDENDS  the m a t e r i a l  presented in  to r e l a t e ' t h e i m p o r t a n c e  t h e d i v i d e n d d e c i s i o n to t h e m a j o r f a c t o r s namely,  the s h a r e h o l d e r , , the f i r m ,  Table Canadians  I shows the  and  1964  cent  50 p e r  total income.  (exclusive  total rela-  For  ex-  received  65.3  accounted  f o r 7.2  .' „  ... i  •.  per  for more  c e n t of t o t a l i n v e s ' t m e n t i n r e c e n t y e a r s ' • ' 1 o f - d e p r e c i a t i o n ) a n d ' t h u s a r e o n e of t h e  major, sources  :  of f i n a n c i n g t h e g r o w t h  Dividends  are  raised  of  Canadian  i m p o r t a n t t o t h e f i r m' s  cing plans in other ways. example,  economy.  are  few.  e a r n i n g s have accounted  :  firms;  Dividends  c e n t of t h e t a x p a y e r s  Retained than  class.  of-the d i v i d e n d s which  c e n t of t h e i r  the  d i v i d e n d s r e c e i v e d by  m o r e i m p o r t a n t ' to- t h e w e a l t h y  a m p l e , -3. 6 p e r per  involved,  what p r o p o r t i o n t h e y a r e , o f the  i n c o m e f o r ea:ch i n c o m e tively  and  of  Canadian  Breweries, for  i t s , a n n u a l d i v i d e n d to $ 1 . 6 0  just before announcing  finan-  a s t o c k r i g h t i s s u e - 'in  a  share 1960.  D o m i n i o n B u r e a u of S t a t i s t i c s , N a t i o n a l A c c o u n t s , I n c o m e a n d E x p e n d i t u r e , O t t a w a , Q^Teen's  P T T n T e r T 19"6 2:, p. W T  TW4 , p. b2 .  •.  TABLE DIVIDENDS  Income class (thousands of dollars)  less  1 . - 2 . 999  3 . - 4.999  R E C E I V E D BY. I N C O M E IN C A N A D A , 1 9 6 4  Percentage of total incomereceivers  than 1  -  10.  -24.999'  25.  and  more  • ': 2. 712.  32. .1  .  23 .3  '  Dividends (millions of dollars)  11. 1  29 .9  5 . - 9.999  I  Percentage of total' dividends  - 39.032 ;  classes  0 .8  6. 6  0 .7  8.7-  0. 5  18 ;8 :  0 -.8 4. 7  3 .2  138 . 628  3 0.'. 8  0.4  .1 5 5".3 75 '  3 4 -. 5 . ' .  all  Dividends as a percentage of total income  .0.6  29 .,562  84.. 707 '  CLASS  100. 0  450 .016  .  . i  100 o • v  . 13 .6  ' 1 .7  S o u r c e : D e p a r t m e n t of N a t i o n a l R e v e n u e T a x a t i o n D i v i s i o n , T a x a t i o n S t a t i s t i c s, P a r t i , O t t a w a , Q u e e n ' s P r i n t e r , 1 9'66~, p p . IT^- 23 .  10 • This  type  tivity  of s t r a t e g y m a y  to t h e new  shareholders d u r i n g the  is  low,  marketing but  the f i r m  •only the pital  i s s u e and  that they  are favourable  i n c r e a s e the may  should  market  c o n v i n c e ' the retain their  recep-  previous  shares  o p e r a t i o n s - . If l o n g - t e r m  working  may  c a p i t a l i n the  wisely borrow  d i v i d e n d rate" but  a l s o the  prospects,  short-run  to m a i n t a i n  not  g o o d w i l l of t h e  ca-  market.' If t h e m a j o r c o r p o r a t i o n o b j e c t i v e i s m a x i m i z a -  t i o n of s h a r e h o l d e r s . large  role  pecially of t h e  stock. .  the  basic,  are  d i s c u s s i o n on  s a t i s f a c t i o n and  is a consequence  be  remains  assume  the  one  inir'  truth of  the  i n the. d i v i d e n d a r e a .  Price  of i n v e s t o r r e a c t i o n s  which  Chapter IV,  a l s o -deals' w i t h t h e q u e s t i o n . '  the  price  above  financing' plans  a f f e c t p r i c e . .But,  i n C h a p t e r V.  - E c o n o m i s t s may  dividend  s o m e of the' s t a t e m e n t s  unsettled problems  fluencing  the  es-  o f " d i v i d e n d s a f f e c t i n g, s h a r e p r i c e  that' d i v i d e n d s  examined  g o a l i s met,  ••  e x t e n t of t h i s a s s u m p t i o n  reaction  play a  h a v e a l a r g e i m p a c t on  example,  shareholder  implicitly and  to w h i c h t h e  r e a l l y - t h e c r u x ' of a n y For  t.lren d i v i d e n d s  •.  question  portance. on  wealth,  in'the extent  if dividends  The is  1 ,  on  theory,  •. '  i n t e r e s t e d i n the f o r c e s i n -  dividend decision for several  reasons,  , First,  . 1 1  s u c c e s s f u l . f o r e c a s t s of t h e c o m p o n e n t s of t h e  national product  d e p e n d to s o m e  d e g r e e on knowing t h e 9  d i v i d e n d ' c o n t r i b u t i o n to p e r s o n a l the  stability  of d i v i d e n d s  of the" e c o n o m i c  playsa  system.  income. role  definite  interest  to g o v e r n m e n t  . . B r i t t a i n , who suggested  that f r o m  a'.public p o l i c y  (1) e f f e c t s o n c o r p o r a t e tions.fdr  liquidity  h a s on g r o w t h i s of  wrote Corporate  :  any influence,  policy-makers.  e f f e c t s of a n a g g r e g a t e d i v i d e n d . ,. 4' "•' significance: :  i n the s t a b i l i t y  And f i n a l l y ,  that a change'in c o r p o r a t e , s a v i n g  Dividend  in total  two  c h a n g e a r e of m a j o r  saving  with i m p l i c a - . -  :  (2) e f f e c t s .on c h a n g e s - i n i n d i v i d u a l  s h a r e -of-the w e a l t h y  Policy,  p o i n t of v i e w  and .'investment;  d i s t r i b u t i o n ; that i s , i n c r e a s e d  Secondly,  income  r e t e n t i o n r e d u c e s the  personal  income.  ' 'Do.broyo Is k y h a s . c l a i m e d that--a g e n e r a l , c h a n g e in d i v i d e n d p o l i c y would l i k e l y affect the n a t i o n a l prod u c t . F o r a n e x p l a n a t i o n s e e : S. P. D o b r o v o l s k y / " E c o n o m i c s of C o r p o r a t e I n t e r n a l a n d E x t e r n a l F i n a n c i n g , " J o u r n a l of F i n a n c e , v o l . X I I ( M a r c h 1 9 5 8 ) , pp. 3 6 - 3 7 . 3 p.  212.  For  further details  lb i d . , p . 4 .  see: Brittain,  op. c i t . , ~  12 S i n e e ; pe r so na 1 i n c o m e d o e s not i n c l u d e c a p i t a l the l a t t e r  effect  has  gains,  little meaning.  Increments  to  economic power would r e m a i n either  unaffected  or  slightly affected. (also'of affect  suggestion  q u e s t i o n a b l e ' m e r i t ) that d i v i d e n d p o l i c y  the o u t c o m e  compare  B r i t t a i n made a f u r t h e r  may  of c o l l e c t i v e b a r g a i n i n g i f u n i o n s  t h e i r wage, s h a r e w i t h d i v i d e n d s i n s t e a d of  net p r o f i t s .  ......  P e t e r s o n g i v e s , , on p . 6 5 , the A m e r i c a n G o v e r n m e n t d e f i n i t i o n o f - p e r s o n a l i n c o m e as. " . . . the c u r r e n t i n c o m e r e c e i v e d by p e r s o n s f r o m a l l sources A s he m a d e . c l e a r ' o n p p . 4 2 1 - 4 2 2 , h o w e v e r , ' a l l . s o u r c e s ' d o e s not i n c l u d e c a p i t a l g a i n s . S e e : W. ,C . P e t e r s o n , I n c o m e , E mp l o y m e n t , and E c o n o m i c G r o w t h , J e w Y o r k , W~7 W. IMorton and . C o m p a n y I n c . , .1 91TTT.  Brittain,  loc . c i t .  C H A P T E R III DIVIDEND I. A N A L Y S I S OF Statistics payout  PATTERNS CANADIAN  TRENDS  i n Table A.I (Appendix  to C a n a d i a n ' p e r s o n s f r o m  A) show the  1926 to 1966. T h e  f o l l o w i n g t r e n d s a re. - e v i d e n t : 1. P a y o u t similar  to r a t i o s  r a t i o s b e f o r e the d e p r e s s i o n a r e i n the- p o s t w a r ' p e r i o d .  2., R a t i o s 'in. t h e d e p r e s s i o n y e a r s a r e m u c h higher  than the o v e r a l l a v e r a g e 3. I n t h e p o s t w a r  erratically -  . ,1 •  from  '  period  ratio. the r a t i o  increased  3 9.0 p e r c e n t i n 19 4.6 to 5.7.6 p e r -  '  cent i n 1966. 4. D i v i d e n d s c h a n g e d as p r o f i t s ,  a l t h o u g h at a s l o w e r  5. G e n e r a l l y , t h e payo'ut' r a t i o The  i n the same  high,  direction  rate.  and except f o r the d e p r e s s i o n ,  has been r e l a t i v e l y depression ratios  the d e c r e a s e d p r o f i t b a s e ,  stable. w e r e a r e s u l t of  the t e n d e n c y  f o r f i r m s to  pay  a stable amount (the l a g mentioned  i n 4 above),  and  t h e l a c k of. i n v e s t m e n t o p p o r t u n i t i e s .  age  resulted' i n a lower c o r p o r a t e demand f o r funds  and  thus e a r n i n g s r e t e n t i o n .  This  short-  ;  14 The  slightly  lower,  e a r l y p o s t w a r ' r a t i o s (1946  to 1 9 5 0 ) w e r e a t t r i b u t e d t o t h e p r e v a i l i n g , p e s s i m i s t i c attitude towards future economic prosperity.  Because  of t h i s f e e l i n g o r b e c a u s e o f t h e o v e r w h e l m i n g for  c o n s u m e r g o o d s , the p u b l i c had l i t t l e  invest.  The consequent d i f f i c u l t y  coupled  w i t h the g r e a t e r  the  greater  the  high  in obtaining  capital partially  t e n d e n c y to c o n s e r v e  a rapid growth i n earnings.  amplified  by the a n t i c i p a t i o n  and  explains  This  by  monies desire  of a d e p r e s s i o n .  low c a p i t a l cost a l l o w a n c e s  was  Rela-  also stimulated a  demand f o r funds. The  by  funds  i n t e r n a l f i n a n c i n g . It i s f u r t h e r e x p l a i n e d  vis-a-vis  high  d e s i r e to  investment opportunity  need f o r w o r k i n g  managements' inherent  tively  desire  period from  considerably  in adjacent  greater  periods,  also noted f o r r i s i n g strong  1950 to 1952 was  characterized  payout and higher  although  ratios  the e a r l y f i f t i e s  than  were  i n v e s t m e n t and supposedly a  demand f o r funds.  This  i n c o n s i s t e n c y i s ex-  p l a i n e d b y the 1 9 4 9 c h a n g e i n t h e m e t h o d s of c a l c u lating  capital cost allowances  substitutionof line method profits  f o r tax purposes.  the d i m i n i s h i n g b a l a n c e  resulted in depressed  but i n c r e a s e d  cash  flows.  The  f o r the s t r a i g h t  after-tax reported  , 1 5 Dividend explains  the  The  stability  low  combined  p a y o u t s i n 1955  only  pay  credit  dividends  (see  years  w e r e the  in. 1.960  and  also  ability greater  1961.  o n l y f o u r of t h e f o r t y y e a r s  s i n c e . 1926  dividends  p a i d to C a n a d i a n p e r s o n s b e e n g r e a t e r  dividends  p a i d to n o n - r e s i d e n t s .  the  d e p e n d e n c e , of t h e  ownership.  have than  T h i s ' f a c t p o i n t s to  C a n a d i a n e c o n o m y on  Moreover,  con-  confidence  t h e r e f o r e , the  C h a p t e r V I I ) , . but  ease e s p e c i a l l y In  and,  earnings  1956.  increased management  about f u t u r e p r o f i t a b i l i t y to  and  high payouts in recent  s e q u e n c e , of n o t  with high  this s t a t i s t i c  foreign .  i n d i c a t e s the  c o n t r o l tha.t" f o r e i g n i n v e s t o r s h a v e o v e r  the  d e c i s i o n in-"Canada. T h i s  diminished  to  s o m e d e g r e e by  the  c o u l d be' r e.gu l a te d b y '  Tables  A.I  generally more than  in Table  A. I I a r e  (see  the  f o r the A m e r i c a n  Canadian ratio higher  l a r g e and  Chapter VII).  A. I I ( A p p e n d i x A )  not  directly  show  economy.  comparable,  in recent  gain are  policy  TRENDS  the A m e r i c a n p a y o u t r a t i o has  reasons for this portion'of  public policy  d i v i d e n d data and  be  government if dividend  II. AMERICAN  Statistics aggregate  c o n t r o l can  dividend  but  increased years.  Two  (1) a g r e a t e r  pro-  e s t a b l i s h e d f i r m s i n the  United  17 S t a t e s ; a n d ( 2 ) t h e l a c k of a c a p i t a l ' g a i n s nada; consequently, desire  Canadians  than A m e r i c a n s f o r  tax in Ca-  s h o u l d have a g r e a t e r  c a p i t a l g a i n s r a t h e r t h a n •,  dividends. The payouts  current American  and r a t i o s  earnings,  b e c a u s e of e x p e c t e d  the T r e a s u r y ' s  g r a m , the l a r g e  outlook i s f o r decreasing d e c l i n e s i nnet  a c c e l e r a t e d tax payment  amounts-of cash  pro-  t i e d up i n t h e a c c u -  m u l a t i n g i n v e n t o r y , and' the c o n t i n u i n g h i g h l e v e l of accounts for  receivable.  the f i r s t , time  of for  are under  pressure  s i n c e '19 5 8 . " ^ III.  Table  "Dividends  INDUSTRY  I I shows the a v e r a g e  d i v i d e n d s on c o m m o n s h a r e s  PATTERNS 1.961 to 1 9 6 5 r a t i o s  to e a r n i n g s  available  such  d i v i d e n d s f o r n e a r - n c r m a l and a b o v e - n o r m a l . " •• 2 growth f i r m s i n c er tain' Indus t r y g r o u p i n g s . The text i l e , m e r c h a n d i s i n g , n o n - f e r r o u s m e t a l , and c h e m i c a l  i  March  " D i v i d e n d s F e e l the P r e s s u r e , " B u s i n e s s 18, 1 9 6 7 , p, 59. _  2  Week,  A n e a r - n o r m a l growth f i r m has a r e c o r d o f a n e t p r o f i t i n at l e a s t f o u r of t h e f i v e y e a r s a n d a p o s i tive t r e n d i n e a r n i n g s and s a l e s over the f i v e year p e r i o d . T h e i n c l u s i o n of d e c l i n i n g f i r m s i n t h e s a m p l e s w o u l d h a v e r a i s e d t h e r a t i o s b e c a u s e of d i v i d e n d s t a - ' b i l i t y and f a l l i n g p r o f i t s .  18  industries  had the l o w e s t - p a y o u t ;  trust companies  gas and o i l p i p e l i n e f i r m s had the h i g h e s t . causing inter-industry Chapters  differences  are  The  and  factors  discussed  in  V and V I . •  T A B L E II  '  A V E R A G E P A Y O U T TO C O M M O N S H A R E H O L D E R S FROM MAJOR CANADIAN-INDUSTRIES I N T H E P E R I O D 1961 T O 1965 Industry  Sample size  Average percentage payout  Beverage-  11  47  Chemical  12  38  Foodstuff  28  Forest product '  46  17- ; .'  49  G a s and o i l p i p e l i n e  10  55  Merchandising  .17  36  Non-ferrous Public Textile Trust All  metal  utility . .• company  industries  ..•  <  ' 12  '- '•'  37  26 16  50 .  3 0-  16  59  165  45  S o u r c e : The F i n a n c i a l P o s t C o r p o r a t i o n ' S e r v i c e , Financial Summary Cards, Toronto, MacLean-Hunter P u b l i s h i n g C o m p a n y , 19 6 6.  •9 The -following F i g u r e s in A p p e n d i c e s industry  B , C,  and  and  Tables,  D,further  which  are  describe, Canadian,  pattern's'.  1. F i g u r e butions  of .1961  weighted  B . l in Appendix, B and  1965  s a m p l e of 190  distributions ximations  payout  ratios for  Canadian  firms  of w e i g h t e d a v e r a g e  of the- t a r g e t p a y o u t  s h o w s the  a.growth  as w e l l  as  ratios (crude  ratios) from  s a m p l e but f o r the' e n t i r e p e r i o d  distri-  1961  appro-  the  same  to 1 9 6 5 .  The  m e a n i s l o w e r t h a n the m o d a l c l a s s f o r a l l t h r e e of d a t a b e c a u s e firms  and  of t h e l a r g e  industries.still  of  i n the r e l a t i v e l y  of t h e i r c y c l e s . T h o s e f i r m s :  low r a t i o  proportion  Canadian early  that w e r e f o r m e r l y  c a t e g o r y . and ' that display'ed' h i g h e r  in the l a t e r  y e a r s d i d so b e c a u s e 1961  to 19 65. w a s  period..  '  •. . •  ; •  .  2. H i s t o g r a m s i n A p p e n d i x  stages in a  payouts  of a d e v e l o p i n g  turity.-and because -  sets  a prosperous  . .; C  ,•  show the  disper-  s i o n of t h e c o m p a n y t a r g e t ' p a y o u t r a t i o s w i t h i n tain major from  1961  occurred textile was  i n d u s t r i e s and to 1965.  The  a l s o the i n d u s t r y  cer-  trends  least normal distributions  i n the c h e m i c a l ,  i n d u s t r i e s . The  ma-  gas  and  o i l p i p e l i n e , and  f i v e - y e a r change i n payouts  m o s t s i g n i f i c a n t i n the c h e m i c a l ,  food,  non-  20 ferrous  metal,  public u t i l i t y ,  and t r u s t c o m p a n y i n -  dustries. ' 3. T a b l e  D . I in Appendix D shows average d i -  vidend payout r a t i o s from dian public f i r m s Generally,  larger  t i v e to p r o f i t s .  within  1951  to 1962 f o r a l l  Cana-  different size categories .  companies "  paid more dividends  re la  C H A P T E R IV T H E O R E T I C A L AND E M P I R I C A L  CONTRIBUTIONS  •I.-, D I V I D E N D D E C I S I O N I N P E R S P E C T I V E The purpose a theoretical basis vestment  of t h i s  s e c t i o n i s (1) to r e l a t e on  the d i v i d e n d d e c i s i o n to  a n d ' o t h e r f i n a n c i n g d e c i s i o n s and to  c o s t of c a p i t a l ; (2) to s t a t e e x t e n s i o n s s i t i o n to the relevance  the.in-  traditional theory;  the  of and  oppo-  (3) to q u e s t i o n  its  i n the r e a l w o r l d ; and (4) to s h o w . w h y . d i -  v i d e n d s , m a t t e r by' the e x a m i n a t i o n of the w i t h i n the c o n t e x t  of t r a d i t i o n a l  problem  theory.  F i n a n c i a l R e l a t i o n s h i p s in Theory A c c o r d i n g to t r a d i t i o n a l t h e o r y ,  f i r m s have  o p t i m u m c a p i t a l s t r u c t u r e - (that i s , a -minimum 1  an  aver-  age c o s t of c a p i t a l ) f r o m w h i c h an o p t i m u m d i v i d e n d p o l i c y c a n be d e r i v e d .  1  A d v o c a t e s o i the t h e o r y  that a c e r t a i n amount  of debt d o e s mot a f f e c t  the  claim mar-  ket c a p i t a l i z a t i o n r a t e a p p l i e d to the e q u i t y s h a r e of earnings,  1  so t h a t . o v e r a l l c o s t s a r e  r e d u c e d by  the  J". F . W e s t o n and E . F . B r i g h a m , M a n a g e r i a l F i n a n c e , New Y o r k , H o l t , R i n e h a r t and W i n s t o n , l n c . , i y b \ 6 , p~p. 4 7 4 - 4 7 6 .  22  increasing  of t h e  tain optimum debt and  debt e q u i t y r a t i o  e q u i t y r a i s e s the  Figure (O)  and  p r o p o r t i o n of d e b t .  2-A  acquiring  a fairly  extent  on  optimum  As  p r e s e n t i n g ' the' m i n i m um t r a c e d out  to  rise..  and be  of i n v e s t m e n t 2-B,  cost  curves  ment that should out  e q u i p m e n t and  c i a t i o n ) ; the  2-B)  marginal  at  the-op-  (MCC)  re-  curves  for different  (MEC)  various  marginal  f o r the  that  at a  f a c i l i t i e s ( a p p r o x i m a t e d by to new  return  total amount  a v a i l a b l e to t h e f i r m  go  on  should;  capital  of  parti-  invest-  u n d e r t a k e n g o e s to r e p l a c e  rest should  ef- .  superimposed  investment  or T3)  can  levels  representing  of t h i s a m o u n t r e p r e s e n t i n g be  the  declining marginal  i n d i c a t e s the  Part  greater  the  curves  t h e i n t e r s e c t i o n of t h e  'investment opportunity time.  ACC.  the  equity,  Since  opportunity are  u n d e r t a k e n ( T I or T2  cular  to a  cost curve  If the  of'capital curves  Figure  firms  requires  p o i n t s on'-the A C C  (as i n F i g u r e  of c a p i t a l a c q u i s i t i o n .  levels  both,  structure  ^) f o r  the f i r m  the'more-expensive, outside  s t r u c t u r e , &• m a r g i n a l  ficieney  (ACC  therefore must rely  c o s t of. c a p i t a l i n t e r s e c t s t h e  be  capital  d e p r e c i a t i o n , and  a v e r a g e cos.t of c a p i t a l w i l l  timum  of  low.level o f ' c a p i t a l (that i s , r e l i -  a m o u n t , of d e b t ) .  m o r e c a p i t a l and  cer-  cost.  c o s t of c a p i t a l  a n c e on- r e t a i n e d e a r n i n g s , appropriate  a  added r i s k  average  s h o w s the  the a v e r a g e  the  Beyond  worn  depre-  investment;  23 the p r o p o r t i o n  of t h i s  debt or  d e p e n d s on  ;  ture  equity  t h a t i s to be  equity that should year's  earnings,  dividends form  as  be  t h a n the  dividends.  invested  t h e n the  because  the  maintained  that i s f i n a n c e d  optimum (Figure  capital 2-A).  is greater  company  should  retained earnings  of e q u i t y . I f t h e  is. less  remainder  are  equity that should  e a r n i n g s ,' t h e  excess  by  struc-  If the than  the  not  pay  the be  should  cheapest invested be  paid  MCG  A  B Legend  k = cost of equity capital k^ = cost of debt capital T - gross investment e  AGC = average cost of capital ' MCC = marginal cost of capital MEC = marginal efficiency of capital F IGURE  DIVIDEND  2  D E C I S I O N IN T H E O R Y  The  explanation. .  = $15  Appropriate gross, investment  $15  Replacement cost (approximated.by .depreciation) -  debt  $  ratio  New investment' f i n a n c e d by d e b t  million  . •  T1  = $25 $25  million  million million  10  .10  investment  Optimum  previous  1• T3  New  s u m m a r i z e s the  following example  $15  5 million .  million  .5  '.5  •  .$2.5  $7 . 5  New investment f i n a n c e d by e q u i t y  2.5  7 . 5  Earnings  • 6  , .  Earnings available for dividends Percentage The the  '-3.5  dividend  forth  6 0 .  58  payout advice.put  .'  • 0  by, n u m e r o u s ' a c a d e m i c s  decision is based  on  the  above  on  relationship.  As' a p r a c t i c a l m a t t e r , h o w e v e r , we w o u l d s u g g e s t t h a t f u n d s be r e t a i n e d o n l y i f i n t e r n a l o p p o r t u n i t i e s o f f e r a c l e a r l y h i g h e r r a t e of r e t u r n , t h a n the m a r k e t c a p i t a l i z a t i o n r a t e f o r the f i r m as a who l e . . . .  G.'D. Q u i r i n , The C a p i t a 1 E x p e n d i t u r e Decis i o n , H o m e w o o d , I l l i n o i s . , R i c h a r d D. I r w i n , I n c . , I W 7 , p . 110 .  26 Extensions  of t h e B a s i c  Theory  on D i v i d e n d  Decisions  S m i t h a p p l i e d the s a m e t h e o r e t i c a l r e l a t i o n s h i p a s a b o v e to t h e e n t i r e e c o n o m y a n d  thus r e a s o n e d  the  d e t e r m i n a n t of t h e  investment  dividend  decision is a prime  decision.^  • Solomon used  the t h e o r y  pragmatic formulation. tures  (C) i s d e t e r m i n e d  required t a c t (M)  The  4  from  and  the net funds  leverage  able,  is high,  the c a p i t a l budget;  The far i n this  the  capital assets i n -  a v a i l a b l e f o r new the o p e r a t i n g  invest-  budget.-  investment  dividend  that a s p e c i f i c  Opti(C-M)  that  equity, o v e r the net funds i s i n d i c a t e d , and  S o l o m o n d i d not p r o c e e d  his f o r m u l a t i o n . ^ World  by  a low  Wisely/  did not c l a i m  Real  g r o s s v o l u m e of e x p e n d i -  i s t h e p o r t i o n of new  be f i n a n c e d  versa.  the following  (L) i s a l s o n e c e s s a r y . When.(I-L)  / (Q) , w h i c h should  to d e r i v e  r e i n v e s t m e n t to m a i n t a i n  m e n t (Q) a r e ' d e r i v e d f r o m mal  that  availvice  f u r t h e r ; he  p a y ou't w o u l d  fo l l o w  from  • ': ' .  Relevance entire theoretical approach  discussed  so  s e c t i o n i m p l i e s that the d i v i d e n d , d e c i s i o n  D. C. S m i t h , " C o r p o r a t e S a v i n g B e h a v i o u r , " T h e C a n a d i a n J o u r n a l of E c o n o m i c s a n d P o l i t i c a l ScTence , v o l . X X I X (August 1963), p p ~ 3 0 1 - 3 U 2 . ' E . S o l o m o n , T h e T h e o r y of. F i n a n c i a l M a n a g e m e n t , New York, Columbia University Press, 1963, pp. 1 4 3 - 1 4 4 . 4  27 should  be s u b s e r v i e n t to t h e i n v e s t m e n t  n e g l e c t s both  the impact  d e c i s i o n and  of the i n f o r m a t i o n a l c o n t e n t s  of d i v i d e n d s ('see S e c t i o n I V o f t h i s  chapter)  i n the  s h o r t - r u n a n d t h e c o n s e q u e n t i a l e f f e c t on m a n y shareholders. gested  Furthermore,  the i m p l i c a t i o n  dividend  to  that i s , the  p a y o u t i s a f u n c t i o n o f t h e o b j e c t i v e to m i n i -  the f i r m ' s , o v e r a l l c o s t of c a p i t a l ,  maximize  many cases per  of t h e s u g -  a p p r o a c h i s t h e s a m e as t h a t of m a n y of t h e  modern explanatory, valuation formulae;  mize  common  cent.  figures  the value  o f t h e f'ir.m: T h e o u t c o m e i n  i s an i n d i c a t e d  Observation  or conversely,  p a y o u t of. e i t h e r - 0 o r 1 0 0  shows that i n p r a c t i c e  a r e , n o t r e - ' a i i s t i c b e c a u s e - of-'the  reasons.  these  following  • '  1. U n c e r t a i n l y i s a s s o c i a t e d w i t h f u t u r e  pro-  fitability.2'v T h e o v e r a l l  concept  or mark.et c a p i t a l i z a t i o n in  the r e a l 3.  market  of t h e c o s t of c a p i t a l '  rate i s difficult  world.  The social  should  decide  welfare  a r g u m e n t i s that the  on r e i n v e s t m e n t ' o f  earnings.  4". M a n y i n v e s t o r s p r e f e r d i v i d e n d s than  to i s o l a t e  capital, gains  i n s p i t e o f ,a h i g h e r  rather  expected r e -  t u r n ( a l l o w i n g f o r r i s k), a s s o c ia.t e d w i t h t h e l a t t e r . Some  need  the s t e a d y  income; they  may  f i n d i t too'  28 difficult  or  too  tuating market be  stubborn, 5.  studies gest  this  a greater  rather.than  or  results  on  h o l d i n g s ; they  of C a n a d i a n a n d  may  on  American  Chapters  m a r k e t and  value  fluc-  lazy.  Chapter.and  that b o t h the  place  A  a f r a c t i o n of t h e i r  naive,  The  (see  c o s t l y to r e g u l a r l y s e l l i n a  V.and VI)  the. d i r e c t o r s ,  stable, generous  unstable,  smaller  in  sug-  general,  dividends  dividends..  Different Approach Porterfield,  i n 196.5', d e r i v e d  an a l t e r n a t i v e  t h e o r e t i c a l a p p r o a c h p r i m a r i l y b e c a u s e of t h e . i m p a c t of d i v i d e n d s ' o n  communication  i n the  short-run  b e c a u s e of c o n s e q u e n t c h a n g e s i n t h e r a t e and  i n v e s t m e n t plans..  mization  of s h a r e h o l d e r s '  dividend  strategy might attain this  that a change i n d i v i d e n d s sum his  His  be  of t h e - m a r k e t p r i c e a n d dividend policy  was  capitalization  criterion  wealth,  and  and,  was  maxi-  in order  g o a l , he  suggested  c h o s e n to m a x i m i z e current  that  dividends.  the Thus,  s t a t e d as f o l l o w s :  ... t h e f i r m s h o u l d d e c l a r e a n d p a y a d i v i d e n d if the r e s u l t i n g d e c l i n e i n m a r k e t p r i c e i s l e s s t h a n t h e a m o u n t of t h e d i v i d e n d p a i d .  J . T. S .' P o r t e r f i e l d , I n v e s t m e n t De c i s i o n s PTenticea n d C a p i t a l C o s t s , E n g l e w o o d C 1 i f f s ', N . J ~ ~ H~aTl, i n c . . , 19 65 , p p . 8 5 - 1 0 4 . _ D  6  I b i d . , p.  88,  •  29 !  Under  conditions  of c a p i t a l r a t i o n i n g , t h e p r o -  j e c t s and the fund s o u r c e s jected  w o u l d be r a n k e d  by the p r o -  c h a n g e s i n m a r k e t p r i c e p e r d o l l a r of f u n d s  required  or supplied.  changes i n the f u t u r e i n the. m a r k e t  These  dividend  p r o c e e d - d o w n the, l i s t  changes  use. The d e c i s i o n maker  until acceptance would  prowould  have un-  At each  step,  t e s t .w h e t h e r s o m e o r a l l o f t h e f u n d s  b e d i v e r t e d , , to d i v i d e n d  payments , s t i l l  - c r i t e r i o n , o f e f f e c t on o w n e r s ' P o . r t e r f i e Id s t r e s s e d retical  and (or)  e f f e c t s - o n the. o w n e r s ' w e a l t h .  h o w e v e r , he w o u l d should  stream  result from  c a p i t a l i z a t i o n -rate r e s u l t i n g f r o m  ject acceptance or.fund  desirable  changes would  using the  wealth.  that the m o r e c o m m o n  approach (see Section  I) i s i n a d e q u a t e  theo-  because  ... i t f a i l s to t a k e a d e q u a t e l y , i n t o a c c o u n t the i m p a c t . o n - t h e owners', w e a l t h of I h e f i r m ' s d e c i s i o n to inves't o r p a y d i v i d e n d s . ' He a l s o  expressed  of r e t u r n tions.  as. a m e a s u r i n g  that the i n t e r n a l , r a t e  device  ha.s.too m a n y  H i s approach, then, considered  shareholders' and  the o p i n i o n  fund  attitude towards r i s k  source under  I b i d . , p.. 1 0 0 .  both  f o r each  consideration.  limita-  risk-and project  3 0 Unfortunately,  Porterfield  d i d n o t s a y how  change in dividend  a f f e c t s the c a p i t a l i z a t i o n  market  more specifically,  price  and,  i s t o be m e a s u r e d .  Nor  did his analysis  resulting price, variations His concept sound  of d i v i d e n d  how  rate  the  although  c o n s i d e r the periods.  theoretically  i s ' ' t o o s i m p l e a n d .too n a i v e i n t h e r e a l  Dividends  or  effect  over changing time  policy  a  M a t t e r v i a the O p t i m u m . C a p i t a l  world.  Structure  i  Theory If t h e M o d i g l i a n i a n d  Miller  t h e c o s t of c a p i t a l i s i n d e p e n d e n t i s a c c e p t e d , the o p t i m u m  proportions vestment could  of d e b t  wouldbe  and  employed  depicted in  t a x e s a s i d e , the  equity used  meaningless.  co n e i t h e r a n . o p t i m u m  nings available  of l e v e r a g e  capital structure  2- w o u l d : riot e x i s t a n d ,  Figure  h y p o t h e s i s that  indicated  to f i n a n c e new  Consequently,  in-  there  r e s i d u a l a m o u n t of e a r -  for dividends,  policy.  Indeed', M o d i g l i a n i and  article  that  nor  an o p t i m u m  Miller  stated  dividend  in their  . . . f o r p r e s e n t p u r p o s e s t h e d i v i s i o n of t h e s t r e a m b e t w e e n c a s h d i v i d e n d s and r e t a i n e d e a r r, : . ' n i n g s i s a m e r e d e t a i l .  F . M o d i g l i a n i a n d M. H. M i l l e r , . " T h e Cost of C a p i t . a l , C o r p o r a t i o n ' F i n a n c e a n d T h e T h e o r y of Investment," A m e r i c a n Economic Review, v o l . X L VIII ( J u n e 1 9 5 8 ) , p. 2 o b . . a  31 Bicksler,  who a r g u e d  (that i s , that an o p t i m u m stated ticle  i n reference  that d i v i d e n d s . d o  dividend  policy  matter  does  exist),  to t h e M o d i g l i a n i a n d M i l l e r - a r -  that  ... t h e s t r o n g e s t c a s e f o r t h e i r r e l e v a n c e o f d i v i d e n d ' p o l i c y , was m a d e v i a a c o s t of c a p i t a l • a r g u m e n t ..... . Bicksler proved for  then responded  with  that the f u n d a m e n t a l and n e c e s s a r y  t h e i r r e l e v a n c e ' of . d i v i d e n d  of p e r f e c t , c a p i t a l m a r k e t s . ler  the following- l o g i c .  have a d m i t t e d  necessary capital  policy  He-  condition  i s the existence  Even M o d i g l i a n i and M i l -  that p e r f e c t  capital  markets  are a  c o n d i t i o n f o r . t h e v a l i d i t y o f t h e i r .cost o f  hypothesis.  In 1 9 6 6 , they  declared:  T h i s i n d e p e n d e n c e , of v a l u e a n d f i n a n c i a l ' s t r u c t u r e i s b a s i c a l l y a r e f l e c t i o n of t h e a s s u m p t i o n of p e r f e c t c a p i t a l m a r k e t s . ^ Therefore,, if their capital  markets  theorem  i s not v a l i d and p e r f e c t  do n o t e x i s t , ' d i v i d e n d p o l i c y  matters.  B i c . k s l e r.-.t-hen pr'oc e e d e d t'o e x a m i n e t h e M o d i 1  gliani Miller  hypothesis  i n the context  of  determining  9  J . E . B i c k s l e r , E m p i r i c a l . T e_s ts- o f C o m p a t i b i l i t y o f Se l e c t e d E q u i t y S h a r e P r i c e " E g u a t i o n s w i t h a Deis c r.i"ptive D i v i d e n d M o d e l , M e n 1 o P a r k , C a l i f o r n i a S t a n f o r d R e s e a r c h I n s t i t u t e , u n p u b l i s h e d , 1 9 6 6 , p. 2. M . H. M i l l e r a n d F . M o d i g l i a n i , " S o m e E s t i m a t e s o f t h e C o s t 'of C a p i t a l t o t h e E l e c t r i c U t i l i t y I n d u s t r y , 1-9 5 4 - 1 9 5 7 , " A m e r i c a n E c o n o m i c R e v i e w , v o l . L V I ( J u n e 1 9 6 6 ) , . p. 3 3 8 . ' " 1 0  32 the p r e s e n c e world.  He  of p e r f e c t c a p i t a l m a r k e t s  cited  the f o l l o w i n g f o r s u p p o r t :  .(1)- w r i t i n g s which claimed  i n the  by'Du r a n d ,  that p e r s o n a l  ^  B o d e n h o r n , and  leverage  real  Barges  c o u l d not  be  s u b s t i t u t e d f o r c o r p o r a t e l e v e r a g e i n the a r b i t r a g e ' 12 process; (2) h i s o w n c o m m e n t o n t h e i l l o g i c a l b a s i s o f • 1 3 the e q u i v a l e n t r e t u r n  class;  (3) t h e s t a t e m e n t levered from its  by  Solomon'that a highly  company, with a consequent risky  equity shares,  shares  has  a higher valuation. placed  ( T h i s p o i n t i s not c o m p a t i b l e  tional behaviour  a s s u m p t i o n and  t r a t i v e 'of how l e v e r a g e  income  can  with'the  on ra-  therefore is illus-  c h a n g e t h e c o s t of  11  B i c k s l e r , o p . c i t . , p p . 6-43. A subsequent s t u d y , b y W i p p e r n , g i v e s f u r t h e r s u p p o r t to B i c k s l e r ' s contention. Wippern used r e g r e s s i o n a n a l y s i s designed to o v e r c o m e p r e v i o u s . m e a s u r e m e . n t p r o b l e m s . S e e : R. F. W i p p e r n >•" F i n a n c i a l S t r u c t u r e a n d t h e V a l u e of t h e F i r m " J o u r n a l of F i n a n c e , v o l . X X I ( D e c e m b e r 1 9 6 6 ) , pp. 6 1 5 - 6 3 3 . .19  D. D u r a n . d , " T h e C o s t of C a p i t a l , . C o r p o r a t i o n F i n a n c e , a n d t h e T h e o r y of I n v e s t m e n t : Comment," A m e r i c a n E c o n o m i c Re v i e w , v o l . X L I X . ( S e p t e m b e r 1 9 5 9 ) , ~p~. b\4b; D ;' B o d e n h o r n~, " O n t h e P r o b l e m of, C a p i t a l B u d g e t i n g , "• J o u r n a 1 of F i n a n c e , v o l . X I V ( D e c e m b e r ' 1 9 5 9 ) , p p . 4 8 4 - 4 8 5 ; A. B a r g e s , T h e E f f e c t of C a p i t a l S t r u c t u r e o n t h e C o s t of C a p i t a l , E:ri~glewood C lTf f s , JN . T. , P r e n t i c e HalTT  IiTcTT  1"B63, p..  Bicksler,  83.  o p.  c i t . , p.  •  19.  33 . 1 4 -  capital.);  C4) the r e m a r k s  by W e s t o n and S o l o m o n o n - t h e  l i m i t e d r a n g e i n the l e v e r a g e i n the M o d i g l i a n i a n d M i l l e r  r a t i o s , of c o m p a n i e s  used  tests;-^  (5) the o b s e r v a t i o n b y - W e s t o n t h a t d i f f e r e n t finitions  of l e v e r a g e  de-  w e r e u s e d i n the, t e s t i n g of e a c h  proposition;-^-''  '  (6) the s t a t i s t i c a l r e s u l t s  o b t a i n e d by P u r a n d ,  We s t o n ,, Ne i l s on , and • B a r g e s , w h i c h -are c o n t r a r y the M o d i g l i a n i and M i l l e r  theorem;  (7) the s t a t i s t i c a l b i a s e s  to  ^  n o t e d by B a r g e s  and  others . ^  14  E.. S o l o m o n , " L e v e r a g e and the C o s t of C a p i t a l , " J o u r n a l of F i n a n c e , v o l . X V I I I ( M a y 1 9 6 3 ) , p p . 2 7 6 - 2 7UT ~ ~ - -*-5j. F . W e s t o n , " T h e M a n a g e m e n t of . C o r p o r a t e C a p i t a l : A R e v i e w A r t i c l e , " The J o u r n a l o f B u s i n e s s , v o l . X X X I V ( A p r i l 1 9 6 1 ) , p . T3~5;. S o l o m o n , T h e o r y of F i n a n c i a l M a n a g e m e n t , p .. 4 0 9 . 1  - •  '  '  W e s t o n , "The M a n a g e m e n t p i t a l : A'-'Review A r t i c l e , " p. 136.  '  '  • -  of C o r p o r a t e C a -  D u r a n d , op,, c i t . , p p . 6 4 9 - 6 5 3 ; J . F . W e s t o n , " A T e s t of C o s t ' oFT! ap"TTal P r o p o s i t i o n s , " S o u t h e r n E c o n o m i c J o u r n a 1 , v o l . 13 ( O c t o b e r 1963) ~ pp." 1"0"7 - 110; . S7 IN e i 1 s o n , M a r k" e t V a l u e and F i n a n c i a l S t r u c t u r e i n the R a i l r o a d I n d u s T r y , T he T r a v e l le r s i n s u r a n c e C o . , O c c a s i o n a l P a p e r N o . 4, M a r c h 1 9 6 1 , p p . 1 3 - 1 4 ; B a r g e s , op. c i t . , pp. 4-0-7 6'. ' • 1 7  1 8  Ibid.,  p.  40.  34 Bicksler valid  concluded  i n the  policy  real  does  that the c h a l l e n g e d  world  and  is i n -  t h e r e f o r e that d i v i d e n d  matter.  I I . EARNINGS VERSUS  ;  theory  DIVIDENDS  Theory One luation  of t h e " o l d ' e s t d e b a t e s , i n t h e s e c u r i t y  field  pitalize  is,concerned  earnings  with whether investors ca-  or d i v i d e n d s . The  conflict  i n t h i s S e c t i o n i s t h e v a l u a t i o n of u n l e v e r e d the c o n f l i c t c o n c e r n i n g  leverage.was  previous.section. In thors,  of v a l u a t i o n ,• o n e  the p u r e e a r n i n g s  stock values  were  theorists,  lyses  of s t o c k p r i c e s a n d  thus  thors %  . •  g r o u p of  have based  on  authat  earnings, i n their  ana-  investors preferences 1  the p r e s e n t  I n d e e d , s o m e of t h e e a r l i e r  on'the. v a l u a t i o n - o f e q u i t i e s b a s e d t h e i r  entirely  i n the  maintained  the a s s u m p t i o n t h a t v a l u a t i o n s e q u a l of d i v i d e n d s t r e a m s .  equity;  . '  a f u n c t i o n of c o r p o r a t e  d e p e n d e n t of d i v i d e n d s . O t h e r s  considered  examined ,  the h i s t o r y  va-  values au-  analyses  dividends:  U n i t i n g the d i v i d e n d g r o u p .  W i l l i a m ' s ,. f o r e x - ' •  1 9 ample,  on  hypothesized:  J.. B . W i l l i a m s , T h e T h e o r y of I n v e s t m e n t V a l u e , C a m b r i d g e , H a r v a rcl U n i v e r s i t y P r e s s , 1 y 3 8 , • pp. 5 5 - 7 0 .  35  (i)  v  -_ V > (TTiF t =I D  0  (  t  )  Where: V  = present  0  =  share  dividend  price  a t e n d of y e a r  i - _ i n t e r e s t r a t e s o u g h t by. i n v e s to r s His  simple  m o d e l was expanded  ance f o r a r e g u l a r (2)  v  D 0  =  o  g (1+  D  .......  5  growth  y l ; +  0  (14Where: D =  This (3) V This (4) V  .  ' D  i)  2 +  -..  Dp  a + g ) ^ (1+i)  2  present  0  g :  allow-  factor.  "D .^+g)  1  to m a k e  0  0  dividend' payment  r a t e of g r o w t h i n d i v i d e n d  =  (1-f- g)*; = d i v i d e n d p a y m e n t i n y e a r t  simplified to: 0  =  £o i - g  • ' 20 i s the s a m e as the b a s i c m o d e l u s e d by G o r d o n . . 0  z  (1 - b) v k - -rb  0  Where: r = r e t u r n on i n v e s t m e n t b '  Y  2  :  proportion retained  g  = rb  i  = k  0  ' = present  of  earnings  earnings  0 ' ' M. J . G o r d o n , T h e I n v e s t m e n t , F i n a n c i n g a n d V a l u a t i o n o f t h e C o r p o r a t i o n ,. H o m e w o o d , I l l i n o i s , R i c h a r d D. I r w i n , i n c . , 1 y 6 2 , p. 4 5 , m o d e l 4 . 6 .  . ' ''  36  T h i s m o d e l a s s u m e s no d e b t , nancing, finity,  k g r e a t e r than  allowance  of o n e .  (2) was e a s i l y  f o r different growth  p e r i o d s . ' . .  _  N ( 5 ) V - \  m o d i f i e d to m a k e a n rates in different"  •  •••D ;(l+g_ ) -* 0  Z _  fi-  r b , r and b c o n s t a n t to i n -  and a quick r a t i o Equation  no o u t s i d e e q u i t y  i  ^  t  -h  '  N  >  Z _ _  (1 + i )  t, = 1  D  t = N-hl  ( l + g - ) r—  1  (1 H - i )  1  '  Whe r e :  . -  g, z h i g h g r o w t h r a t e ( f o r e x a m p l e , 20 p e r c e n t f o r N.;years)  •  ".g =; n o r m a l g r o w t h r a t e ( f o r e x a m p l e , 5 p e r cent after N'years) n  Thus, nings and  stock prices  are: not independent  a n d c a p i t a l b u d g e t s ,.. s i n c e r e t a i n e d e a r n i n g s  company  investments  a r e c o n s i d e r e d major' fac-  t o r s - i n t h e p r o s p e c t i v e - g r o w t h of t h e d i v i d e n d The  remaining  theory.  The latter  group suggests  . Dividends Brigham  the d i v i d e n d  t h a t -the  earnings  on the s t r e a m  of - d i -  that -different d i v i d e n d s and payout r a t i o s ,  make a difference  ring  theory and those,  i n v e s t m e n t s ' have an i m p a c t  vidends.but  stream.  c o n f l i c t l i e s - b e t w e e n t h o s e - who, a d v o -  cate' t h e p u r e e a r n i n g s  and  of e a r -  i n equity valuation. r a t h e r than  earnings.  Weston and  argue f o r the d i v i d e n d advocates  to a f i r m  by  refer-  t h a t p a i d no d i v i d e n d s i n t h e i m m e d i a t e  37' ' past: ". . . b y r e t a i n i n g e a r n i n g s it. i s b u i l d i n g up i t s e a r n i n g b a s e a n d . . . at s o m e p o i n t i n t i m e i n v e s t o r ^ e x p e c t t h e f i r m to b e g i n to p a y dividends."^ 1  As  B o d e n h o r n , and  cated,  discounting  R o b i c h e k and tHe  stock's  M y e r s have i n d i -  s h a r e , of f u t u r e  ' '  earnings  2 2 involves ture  double counting.  period  vested  is likely  to be  part  i n a.-.-previous, p e r i o d .  double counting More  leads  recent  in.come i n any  of t h e  b a c k to t h e  that the  argument is essentially M o d i g l i a n i showed  earnings  A d j u s t m e n t of  pure,  dividend  a sterile  one.  (earnings  stream,  portunities, formula, m a k e s no  and  'earnings Miller  under highly abstracted  dividends  net  earnings  Thus  t i o n a l i n v e s t o r s ) - that f o u r m a j o r v a l u a t i o n  rein-  approach.  versus  tions (perfect c e r t a i n t y ,.perfect markets,  and  condira-  approaches,  stream , investment  cash flow)  r e d u c e to t h e  and  h e n c e ' t h e a m o u n t of d i v i d e n d 23 difference.  fu-  this  dividend  a d v o c a t e s ' , of t h e  g r o u p haver c l a i m e d  and  Actual  op-  same  payout  21 W e s t o n and  Brigham,  Managerial  F inane e ,  p.  298. 22' • B o d e n h o r n , o p . c i t . , p. 4 7 3 ; A. A. Robichek a n d S. C. M y e r s , O p t i m a r~"F i n a n c i n g D e c i s i o n s , New Y o r k , P r e n t i c e ' - H a 1-1 , I n c . ., 1 y 6 b , p. b 8 . 23  • • ' M.H. M i l l e r a n d F . M o d i g l i a n i , "Dividend P o l i c y , G r o w t h , a n d t h e V a l u a t i o n of S h a r e s , " J o u r n a l of B u s i n e s s , v o l . X X X I V ( O c t o b e r 1 9 6 1 ) p. 4 1 7 , m o d e l 9"! "• 1  • . oo (6)  .  V, o  x (t)  Where: p — c a p i t a l i z a t i o n '.  . . • X  (t)  i l l u s t r a t e d , t h i s by  growth.,  year t  deriving  reinvesting  in terms  d e b t 'and vidends  no and  =.J2. k  capital E  h  k  the  g a i n s and  His assu-mptions  the  we re no  In t e r m s  of d i -  gains:^ • Where: V  m  amount),  capital  outside equity financing.  _|_ e  of e a r n i n g s .  - firm's market  value  e  D  - dividend in initial period.  E  k  =  b  :  g  =  r m  p.  empty  two. s i m p l e  a constant dollar  i n t e r m s - of d i v i d e n d s a n d  second  (7) V  the i s s u e , i s an  v a l u a t i o n m o d e l s ( s i m p l e g r o w t h r e f e r s to-  the f i r m first  (tTj  i  income, year t  :  Solomon' also c l a i m e d He  8  rate (expected yield, dividends a n d g a i n , o n co. m m on • stock)  I (t) z i n v e s t m e n t ,  one.  -  3  24 •'. S o l o m o n , T h e o r y 60, m o d e l 5-5.  =  =  net o p e r a t i n g  income  p r o p o r t i o n of retained.  earnings  e x p e c t e d y i e l d on c o m m o n -stock r e t u r n on r / k ,  Investment  where r >  k  of F i n a n e i a 1 M a n a g e m e n t ,  3 9 In  terms  of e a r n i n g s :  _5 ,  (8) V -  k  b  e  E  k  11  e  Solomon concluded be  -  ( m  • that because  made e q u i v a l e n t , v a l u a t i o n  terms  the two  c a n be  models could  expressed in  of d i v i d e n d s o r e a r n i n g s . H o w e v e r , h i s  second  m o d e l c l e a . r l y does not I n v o l v e , a pure..,earnings Lintner and  c e n t r e d on the p r o b l e m  p u i s s a n t a r t i c l e : and  '  In a  stream  theoretical  concluded, after beginning his  analysis  under'idealized'neo-classical  relaxing  assumptions  one  by  one,  conditions  and  that:  The "divid.end t h e o r y " ' . . . r e m a i n s v a l i d even , u n d e r ' f u l l y . g e n e r a l i z e d c o n d i t i o n s a n d s h o u l d be the b a s i s f o r f u r t h e r t h e o r e t i c a l w o r k . The s o c a l l e d e a r n i n g s t h e o r y i s v a l i d i f and o n l y i fi t i s s t a t e d i n f o r m s i d e n t i c a l l y r e d u c i b l e to t h e \ v a l u a t i o n of t h e c a s h d i v i d e n d f l o w to t h e i n v e s t o r . . In p a r t i c u l a r , t h e s i g n i f i c a n c e of t h e t i m e v e c t o r s of e a r n i n g s ( a n d of c o m p a n y i n v e s t m e n t s ) l i e s i n i t s i m p l i c a t i o n s f o r t h e p r o s p e c t i v e s t r e a m of d i v i d e n d s , r a t h e r tha.n v i c e v e r s a . " Other  m o d e l s and  t h e i r i m p l i c a t i o n s . The  lomon simple growth  mo-de 1 i s • i d e n t i c a l t o a n 27  tory  by  model prepared  mental  premise  was  l b i d . , p. 26  W a l t e r v i n 1956.  that s t o c k p r i c e s 60,  model 5 -  explana-  His  reflect  So-  funda-  the  6.  John L i n t n e r , " D i v i d e n d s , E a r n i n g s , L e v e r a g e , S t o c k P r i c e s a n d t h e S u p p l y of C a p i t a l t o C o r p o r a t i o n s , " . R e v i e w of E c o n o m i c s a n d S t a t i t i c s , v o l . . X ' L I V ( A u g u s t i y 62) , p. "ZWtT. ~ ~ : 27 J a m e s E. W a l t e r , " D i v i d e n d P o l i c i e s a n d Com m o n S t o c k P r i c e s , " T h e J o u r n a l of F i n a n c e , v o l . X I ( M a r c h 1 9 5 6 ) , p. 2 8 3 , "mo d e l l , ~ .  40 present  v a l u e s of e x p e c t e d d i v i d e n d s and t h a t  tained earnings  influence this value  through t h e i r effect  re-  principally  on the g r o w t h of d i v i d e n d s .  R D + R~7 ( E - D) a  (9) V  =  R.„ Where:  R R  When R  a  a  c  = market c a p i t a l i z a t i o n adjusted to 100 p e r c e n t p a y o u t  D=  cash dividends per  E -  earnings  is greater  p l a c e d on r e t a i n e d hence a d e c r e a s e earnings,  = r a t e of r e t u r n on a d d i t i o n a l investment  per  than R  earnings  n  share , more weight is  i n i t s e f f e c t on v a l u e ;  i n the d i v i d e n d , g i v e n  will increase  share  constant  the v a l u e of the s h a r e .  Thus,  a c c o r d i n g to t h e s e m o d e l s , f i r m s w i t h h i g h p r o f i t ability should retain their earnings, When R  a  equals R ,  share p r i c e .  r  and v i c e  versa.  d i v i d e n d p o l i c y has no e f f e c t  on  41 An example: D ividend  Valuation where : R  a  = . 12  R  c  E  V a l u a t i o n whe r e : .  R  a  = • 06  R  c  -  E  $3  .06  =  = .06 =  $3  $3  $50.00  $50.00  2  66.66  50.00  1  . 8 3 . 8 3  0 If  50.00  100.00 retained earnings  and subsequent  are i n c r e a s e d and i n v e s t m e n t change, then would tend  50.00 investments  o p p o r t u n i t i e s do n o t  the r e t u r n on a d d i t i o n a l i n v e s t m e n t ,  t o f a l l b e c a u s e of t h e d e c l i n i n g  e f f i c i e n c y of c a p i t a l .  R , 9  marginal  A n y a n t i c i p a t i o n of s u c h  a fall  would affect stock values. S i m i l a r l y ,  as d i v i d e n d s  changed i n the p r e s e n c e  i n v e s t o r s , the  market capitalization  of i r r a t i o n a l  r a t e w o u l d a l s o be e x p e c t e d  change ( W a l t e r s had c a r e f u l l y pitalization  of  these  d e f i n e d the m a r k e t c a -  r a t e a s a d j u s t e d to 100 p e r c e n t  Thus under r e a l  world  m o d e l s a r e not d e f i n i t e  the n a t u r e  payout).  c o n d i t i o n s , the i m p l i c a t i o n s  on t h e r e a c t i o n s a n d p r e f e r e n c e s and  to  and c l e a r l y  depend  o f the s h a r e h o l d e r s  of i n v e s t m e n t o p p o r t u n i t i e s .  42 "Solomon-.formulated another model, in. terms of d y n a m i c creasing  growth, where a f i r m  amount.  CIO) V = f -  -f  r e i n v e s t s an i n -  ^  V b m  e This  i s . e q u i v a l e n t to t h e G o r d o n m o d e l .  These dy-  namic  models'of v a l u a t i o n i n d i c a t e the same  policy  as the W a l t e r  m o d e l ; that i s , as long as r e -  t u r n on inves'tment i s g r e a t e r stockholders a higher  and  common  stock.value. the t h e o r e t i c a l  has been away f r o m  towards the d i v i d e n d  tained  than the r e t u r n the  e x p e c t , a. l o w e r ' d i v i d e n d - w i l l r e s u l t i n  In- g e n e r a l , years  dividend  earnings  the pure  approach,  emphasis earnings  i n recent theory  i n c l u s i v e , of r e -  as a m a j o r , d e t e r m i n a n t of t h e p r o s -  p e c t i v e - g r o w t h - o f the ' d i v i d e n d s . Tn s p i t e of v a r y i n g claims  a m o n g t h e o r i s t s m o s t of t h e m o d e l s  are equi-  valent. Empirical  Results  Graham earlier mulated  p.  et a l . , B u r r e 1 ( 1952) . A s a r e s u l t of  suggestions, a simple  G r a h a m , Dodd, and C o t t l e  for-  r u l e o f t h u m b based'- o n o b s e r v a t i o n  S o l o m o n , T h e o r y of F i n a n c i a l M a n a g e m e n t , 7 0 , m o d e l 5' - 7 .  . 4 3 and  experience  t h a t d i v i d e n d s s h o u l d be '9  times  retained earnings  B u r r e l l t e s t e d - and study  in valuation.  upheld  of p a i r e d s t o c k s . ^ 0  D o d d , and  Cottle  a v e r a g e and  four  9 I n 195 2,  their  suggestion with a  Later  (1962),.Graham,  restricted  their formula 3 1  railway stocks  vestors.' changing  worth  to h a r m o n i z e  a t t i t u d e s and  suggested  to b e l o w with i n t h a t i n the  case  o f . g r o w t h s t o c k s o n l y e a r n i n g s s h o u l d be c o n - ' 3 2 sidered... '29 B. G r a h a m , D. D o d d a n d S. C o t t l e / - S e c u r i t y A n a l y s i s , New York, McGraw-Hill Book Company, 19 5 1, p. 4 5 4•. 3  0 ' O'. K.. B a r r e l , " D i v i d e n d s v e r s u s R e t a i n e d E a r n i n g s as a M a r k e t F o r c e , " The C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , v o l . 176 (7Tugust 2 i ,- I 9 b 2 ) , pp~T7^9-30. '—~ 3 1  G r a h a m , D o d d , and C o t t l e , S e c u r i t y A n a l y s i s , M c G r a w - H i l l B o o k C o m p a n y , 19 6 2 , p~ 5 1 6 , d e f i n e d b e l o w - a v e r a g e s t o c k s as ... t h o s e , s t o c k s w h i c h -have ( a ) s o l d f o r s o m e r e c e n t p e r i o d of t i m e , s u c h a s t h e a v e r a g e of t h e l a s t f i v e y e a r s , at l e s s t h a n a p p r o x i m a t e l y \\ t i m e s ' t h e i r b o o k v a l u e a n d (b) e a r n e d , a r e t u r n on book v a l u e f o r the s a m e p e r i o d b e l o w that f o r , s a y , S t a n d a r d a n d P o o r ' s 425 i n d u s t r i a l s t o c k s . . 3 2 I b i d . , pp .. 5 1 7 - 5 18 .  • 44 Harkavy  ( 1 9 5 3 ) . H a r k a v y ,• to r e c o n c i l e t h e p r e -  vailing.'opinion among the f i s c a l  theorists  the s e c u r i t y a n a l y s t s , c o n s i d e r e d v e r s u s the l o n g - r u n 33  impact  the i n s t a n t a n e o u s  of d i v i d e n d s  lue.  Harkavy  concluded  varied  directly  with d i v i d e n d s but o v e r  time  the. p o s i t i v e  tained  earnings  haps . over  and p r i c e .  H i s c o n c l u s i o n was  per-  :  the s i z e  of h i s . s a m p l e , a n d t h e  of g r o w t h on h i s r e s u l t s .  dends a r e most i m p o r t a n t  and  a p e r i o d of  g e n e r a l i z e d on t h e b a s i s of h i s s t a t i s t i c a l  growth mutual funds,  value  prices  existed between r e -  B u r r e 1 (.1957). A f t e r p a i r i n g two  on s h a r e v a -  that at a g i v e n t i m e ,  relationship  methods and r e s u l t s , influence  with t h a t o f  of c o m m o n s h a r e s  . eighty stocks  Burr el concluded iiiinfluencing even i n the case  that  from divi-  the m a r k e t of g r o w t h ,  that a p p a r e n t l y " I n v e s t o r s do n o t r e g a . r d r e t a i n e d e a r n i n g s as e q u i v a l e n t to m o n e y d e p o s i t e d a t ' a h i g h . e a r n i n g ' r a t e. "3 4 G o r d o n ( 1962) . G o r d o n , a f t e r  e f f e c t of s e v e n v a r i a b l e s i n c l u d i n g  examining dividends,  the risk  33 Harkavy, 34  ojo . ci__t. ,  passim.  B u r r e i , " R e l a t i v e V.alue o f E a r n i n g s : t a i n e d , a n d D i s t r i b u t e d , " p p . . 2 8 - 2 9.  Re-  45 class,  and  growth  gression analysis  on the v a l u a t i o n  of s h a r e s b y  on f o r t y - e i g h t f i r m s  i n d u s t r y ,' c o n c l u d e d  re-  i n the f o o d  t h a t d i v i d e n d s w e r e of  signifi35  cant i m p o r t a n c e Indeed,  in their  the- i n f l u e n c e  all other factors  e f f e c t on s h a r e  of d i v i d e n d s w a s  combined.  out, Gordon's p r o c e d u r e  As  was  evaluation.  g r e a t e r than  W e s t o n has  invalid;  By  pointed measuring  g r o w t h as e a r n i n g s l e s s d i v i d e n d s o v e r net w o r t h , the i n f l u e n c e of d i v i d e n d s w a s h i g h l y e x a g g e r a t e d . ^6 F i s h e r ( 1 9 6 3 ) . F i s h e r . e x a m i n e d t h e e f f e c t s of four variables  on  share  prices  ket i n E n g l a n d  f o r the y e a r s  p r e v a i l i n g Im.t '37  1949  to 1957.  he  riiar-  . These  were: (1) l a s t d e c l a r e d d i v i d e n d . p e r s h a r e ; (2) l a s t d e c l a r e d u n d i s t r i b u t e d share;  per  - . (3) p a s t a v e r a g e  per  profits  annual  growth  in dividends  share; (4) s i z e of  company:  35 G o r d o n , I n v e s t m e n t , F i n a n c e , and Va l u a t i o n of t h e C o r p o r a t i o n , ~ p p ~ ! HT2- 145 , 1 8 1 - 1 ST7 3 6 • J . F . W e s t o n , ' " R e v i e w , " T h e J o u r n a l of F i n a n c e , v o l . X V I I I ( S e p t e m b e r 19 BUTT p. 5 8 0 . 3 7  G. R. . F i s h e r , " S o m e F a c t o r s I n f l u e n c i n g Share P r i c e s , " E c o n o m i c J o u r n a l , v o l . L X XI (March 1 9 6 1 ) , p p . 1 2 1 - ITT. ~  .46 In  s p i t e of t h e f a c t  validity  t h a t he d o u b t e d  the s t a t i s t i c a l  of h i s r e g r e s s i o n a n a l y s i s ,  that i n a l l c a s e s  he  concluded  (1) h a d by f a r the l a r g e s t  impact,  (2) a n d ( 4 ) h a d s o m e i n f l u e n c e i n t h a t o r d e r portance,  a n d ( 3 ) h a d no  Ashley, Barker,  Barker,  of i m -  significance.  S o g a n i c h . S t u d i e s by  Ashley,  a n d ' S o g a n i c h * p o i n t to. t h e i m p o r t a n c e  v i d e n d s , i n t h e s h o r t - r u n ( s e e S e c t i o n IV .of r  of d i -  this  ,  O f f  'chapter).  -  t  Friend refined  and P u c k e t t ( 1 9 6 4 ) .  s t u d y b y F r i e n d a.nd P u c k e t t c l a i m e d  o v e r c o m e .many.: of t h e s t a t i s t i c a l previous  A r e c e n t and h i g h l y  efforts  to i s o l a t e  share, p r i c e . 'After r u n n i n g sion analysis f o rfive  to. h a v e  bias.es i n h e r e n t i n  t h e e f f e c t of d i v i d e n d s on cross-sectional,  industries  regres-  f o r the y e a r s  1956  , J . W. A s h l e y , " S t o c k . P r i c e s a n d C h a n g e s i n E a r n i n g s a n d D i v i d e n d s , - 'Some E m p i r i c a l R e s u l t s , " J o u r n a l of P o l i t i c a l E c o n o m y , v o l . L X X ( F e b r u a r y ' 19 6 2 ) , p p . 8~2-85; TJ. A u s t i n B a r k e r , " E f f e c t i v e S t o c k S p l i t s , " H a r v a r d B u s i n e s s R e v i e w , v o l . 34 ( J a n u a r y - . F e b ' r u a r y 1 9 5 6 ) , pp~i 10 1 - 10~6 ; C . A u s t i n B a r k e r , " E v a l u a t i o n of S t o c k D i v i d e n d s , " H a r v a r d Business R e v i e w , v o l . 36 ( J u l y - A u g u s t 1 9 5 8 1 , p p . 9 9 - I 1 4 ; M 2 . A u s t i n B a r k e r , "Stock Splits i n a B u l l M a r k e t , " H a r v a r d B u s i n e s s R e v i e w , v o l . 3 5 ( M a y - J u n e 19.57), p p . 72-79; J.. Soganich, " P r i c e s a n d D i v i d e n d s : s o m e a n a m o l i e s s h o w , " T h e F i n a n c i a l P o s t , A p r i l T, 1 9 6 7 , p. 1.  47  and 1958 they, s t a t e d : T h e r e i s s o m e i n d i c a t i o n t h a t i n the non g r o w t h i n d u s t r i e s . . . h i g h e r i n v e s t o r v a l u a t i o n m a y be p l a c e d on d i v i d e n d s t h a n on r e t a i n e d e a r n i n g s w i t h i n the r a n g e of p a y o u t e x p e r i e n c e d , but t h a t the o p p o s i t e m a y be t r u e i n g r o w t h i n d u s t r i e s . T o the e x tent that t h i s c o n c l u s i o n i s v a l i d , it i s p o s s i b l e t h a t m a n a g e m e n t m i g h t be a b l e , at l e a s t i n s o m e m e a s u r e , to i n c r e a s e s t o c k p r i c e s i n n o n g r o w t h i n d u s t r i e s by r a i s i n g d i v i d e n d s , and i n g r o w t h i n d u s t r i e s by g r e a t e r r e t e n t i o n . H o w e v e r , the e v i d e n c e . . . i s r a t h e r t e n u o u s and t h e r e i s no c o n v i n c i n g i n d i c a t i o n of w i d e s p r e a d m a n a g e m e n t i r r a t i o n a l i t y or i r r e s p o n s i b i l i t y in payout p o l i c y . ^ Further,  t h e y a d m i t t e d t h a t t h e i r a n a l y s i s was  limited  in i n d u s t r y c o v e r a g e ,  t i m e p e r i o d , and l i n e a r i t y  sumed.  do not r e a l l y a n s w e r  Their results  original objectives,  namely,  payout r a t i o r e g a r d e d  to i n d i c a t e the  by i n v e s t o r s  d i t i o n s or even whether  one of t h e i r optimal  under v a r y i n g con-  t h e r e i s an o p t i m a l r a t i o  d e p e n d e n t on p r o f i t p r o s p e c t s .  as-  The authors  not  concluded:  . . . f u r t h e r s t u d y of o p t i m a l r a t i o s , w h i l e r e latively simple in theoretical- terms , involves m u c h m o r e c o m p l i c a t e d a n a l y s i s t h a n has b e e n attempted here. 0  39  I . F r i e n d and M . . P u c k e t t , " D i v i d e n d s and Stock P r i c e s , " A m e r i c a n E c o n o m i c R e v i e w , v o l . L I V ( S e p t e m b e r 196 47, p . 68 0. ~ ~ 4 0  Ibid.  B i c k s l e r - ( 1966). B i c k s l e r ' s compatible  with  F r i e n d and  c o n c l u s i o n was  Puckett ' s  •  statement:  " .:. t h a t t h e r e i s . l i t t l e b a s i s - f o r t h e c u s t o m a r y . v i e w ... a d o l l a r of d i v i d e n d s h a s t h e i m p a c t s e v e r a l t i m e s t h a t of r e t a i n e d e a r n i n g s . " 4 1  Thus, while as  a major  free from  m o s t s t u d i e s p o i n t to  variable affecting  price,  none i s  e r r o r or b i a s . B a s i c a l l y ,  any  c a u s e and- e f f e c t r e l a t i o n s h i p b e t w e e n . d i v i d e n d s  and  price  statistical  share  dividends  is extremely  d i f f i c u l t to d e t e r m i n e b e c a u s e  the ' i n f o r m a t i o na 1 r o l e  dividends  d i v i d e n d s - and  are  Nevertheless, suggested price,  earnings not  one  very  statistical  that dividends  h a v e no  p l a y and  hypothesis  study  cite'd.has  e f f e c t on do  Bicksler,  op.  '  •' .  c i t . , p . . 10 0 .  '  share  matter  t h a t . i n p r a c t i c e the p u r e  is incorrect.  because  highly; c o r r e l a t e d .  w h i c h indicates, that d i v i d e n d s  s o m e d e g r e e and  of  to  earnings  •  .  III.  MILLER-MODIGLIANI  The  M I l l e r - M o d i g l i a n itheorem  a l m o s t a l l of t h e sults and in  (which  an  other  HYPOTHESIS  t h e o r i e s and  conflicts  with  empirical re-  h a v e b e e n to a l a r g e e x t e n t r e c o n c i l e d ) ,  is,-therefore , investigated in considerable this  detail  tchapte r . Miller  the  49  question  and  M o d i g l i a n i ' c o n c e n t r a t e d ' i n 1961  of w h e t h e r  explanatory  dividends  m o d e l b a s e d on  matter  and  on  through  neo-classical condi-  tions concluded:• ... g i v e n a f i r m ' s i n v e s t m e n t p o l i c y , ' t h e d i ^ vide-nd p a y o u t i t c h o o s e s t o . . f o l l o w w i l l a f f e c t n e i t h e r ' t h e c u r r e n t p r i c e of . i t s s h a r e s n o r t h e t o t a l r e t u r n , to i t s s h a r e h o l d e r s . . . \: On ;  the  assumptions  t iona 1 behaviour, blished  of p e r f e c t c a p i t a l m a r k e t s ,  and  perfect certainty  a m o d e l of s h a r e  terms  of v a l u e  (il) V  (t) =  v a l u a t i o n and  to t h e f i r m . ^3 1  (I'-j-p)  D  ra-  they,; e s t a restated it in  .  (f)4- V  ( t - h 1) - m  of<. t h e  firm  ( t + 1) p  (W  1  Where: V  (1) = t o t a l v a l u e  p ( t ) z r a t e of r e t u r n , to  shareholder  D  (t) = t o t a l d i v i d e n d s p a i d i n t t o h o l d e r s , at b e g i n n i n g of t -  m  ( t - ( - l ) = n u m b e r of n e w s h a r e s ( i f any) s o l d i i t a t e x - d i v i d e n d c l o s i n g p r i c ep( t +- 1)  Growth, 4 3  M i l l e r and M o d i g l i a n i , . " D i v i d e n d P o l i c y , a n d t h e V a l u a t i o n ' o f S h a r e s , " p. -414. I b i d . , 'p. ,413 ,' m o d e l 3 .  "  •  • •  50 Miller future  and  dividend  Modigliani further assumed  policy  d e c i s i o n i n t., s o the  current  i s i n d e p e n d e n t of t h e  that V  dividend  (t+1)  in d i v i d e n d s , sold  two  s e t up  rise,  the  by  firm  Miller  the  and  lue. ables  h a v e ' an  T h a t i s , the holders  shares  and  increased  'opposite  p a y o u t has  no  under these  with  e f f e c t on  result present  a s s u m p t i o n s , no  a  that  the  of.the f i r m ' s  e f f e c t on  c a s h p a y m e n t s to  the  shares  abstracted  result  e x a c t l y c o m p e n s a t e s thei-r l o w e r  terminal value,  change  to m a i n t a i n  w i t h the share  va-  dividends  s h o w e d t h a t e a c h of t h e s e  equal  firm  of new  M o d i g l i a n i , as  must s e l l more  authors  e f f e c t on  pe r i o d., ..In the-  o w n e r s -have a. l o w e r  The  an  of  above  v a r i a b l e s , (1) a  d e s i r e d l e v e l of i n v e s t m e n t , , original  dividend  i n the  and. (.2). t h e v a l u e  to o u t s i d e r s d u r i n g  world  has  remaining  per.se,  the  is also independent  decision. Thus,  model, a change in dividend lue t h r o u g h the  that  t h a t the firm  two  va-  vari-  firm  value.  current share  of  amount  value.  the  of  Therefore  difference exists  bet-  w e e n t h e . t w o f i n a n c i n g s t r a t e g i e s : r e t e n t i o n of- e a r nings  versus  dividend  more  shares.  The  increase  authors  i n the  clear,  real world  and,  indeed,  p o i n t of m u c h of t h e  ambiguity  criticism  of  to - r e l a x t h e i r  m o d e l was  the v a l i d i t y this  the f l o a t i n g  proceeded  a s s u m p t i o n s to s h o w t h a t the but  and  of t h e has  still  relevant  m o d e l i s not been'the  of t h i s p a r t i c u l a r  focal work  51 To  illustrate  their  criticism  tion f o r m u l a e , they d e r i v e d  of t h e o t h e r  valua-  a m o d e l i d e n t i c a l to the  G o r d o n m o d e l and showed that i t i s r e l e v a n t  only i n  the  s p e c i a l c a s e of c o m p l e t e i n t e r n a l f i n a n c i n g . I n  the  c a s e , of s o m e  more  slowly  external financing, dividends  than  grow  earnings.  ... t h e . g r o w t h r a t e , o f d i v i d e n d s p e r s h a r e i s n o t . t h e s a m e a s t h e g r o w t h r a t e of t h e f i r m e x cept i n the s p e c i a l case i n w h i c h a l l f i n a n c i n g i s i n t e r n a l . . T h i s i s m e r e l y , o n e of a . n u m b e r o f p e c u l i a r i t i e s of t h i s s p e c i a l c a s e , i n w h i c h , u n f o r t u n a t e l y , m any'w r i t e r s h a v e b a s e d t h e i r e n t i r e a n a lysis. 4  4  The fact  authors  dividends  also, e m p h a t i c a l l y  do n o t m a t t e r  s i t u a t i o n in. w h i c h the f i r m ' s is the same where R  conditions markets  c  of p e r f e c t  that the  i s not r e s t r i c t e d  of r e t u r n  i n the W a l t e r  (that i s ,  model).  c e r t a i n t y and p e r f e c t  4 5  Under, capital.,  h o w e v e r , t h e s i t u a t i o n of i n v e s t m e n t  tunities yielding a return  greater  t a i n t y , f o r e s i g h t i s not r e w a r d e d ,  privileged valid,  opportunities  then f o r m u l a t i o n s  I b i d . , p. 4 2 4. Ibid.,  p. 4 1 4 .  oppor-  t h a n the m a r k e t  r a t e of r e t u r n ' i s d i f f i c u l t ' t o v i s u a l i z e . U n d e r  does not b r i n g a p r e m i u m  to the'  i n t e r n a l r a t e of r e t u r n  a s .the m a r k e t r a t e  equals R  a  stated  acceptance  (for there  cerof r i s k  i s no r i s k ) ,  do n o t e x i s t .  and  If this logic i s  by a l l t h e o r i s t s  considered  5 2 u n d e r c o n d i t i o n s of p e r f e c t c e r t a i n t y w o u l d with  the  Millar  Gordon, w i t h the  proof  Modigliani  theorem.  in a rebuttal, of t h e  theorem  found  nothing  u n d e r the  he  concluded  price. is  aversion  He  and  reasoned  as  w i t h the  dividend  the h i g h e r  hinges  are  share  dividend increased  rate equals  constant..  time,  the i n -  If, however,  with future, r e c e i p t s  rises,  c h a n g e to a d j u s t f o r ' i n v e s t o r i r r a -  r e c e i p t s i' t h e  question is  market  rate, a s s o c i a t e d  t i o n a l i t y and future  i f the  rate, price remains  the' m a r k e t  changes  f o l l o w s : If t h e n e a r  thus d i s t a n t d i v i d e n d s  u n d e r c e r t a i n t y and ternal  assumptions  i n c r e a s i n g uncertainty with  t h a t - a c h a n g e 'in d i v i d e n d  reduce.d and  wrong  assumption  'of f u t u r e c e r t a i n t y . H o w e v e r , u n d e r t h e of r i s k  concur  on  d e g r e e of r i s k , a s s o c i a t e d  price will fall.  whether  a f u n c t i o n of t h e  dividend  sented' t h e o r e t i c a l and  the rate,  Therefore, discount  the  rate  G o r d o n has  e m p i r i c a l evidence  in  with  ... pre-  support  of t h e a f f i r m a t i v e . ^ 4  The. future  inclusion  discount  of i n c r e a s i n g a m o u n t s of r i s k  in  r a t e s r a i s e s a n o t h e r p ' o b l e m i n the  45  G o r d o n , M. J . " O p t i m a l I n v e s t m e n t a n d F i n a n c i n g P o l i e y, " J o u r n a l of F i n a n c e , v o l . X V I I I (May 1963 ), p. 2 6T7" 47 G o r d o n , . I n v e s t m e n t , F i n a n c i n g and V a l u a t i o n of t h e C o r p o r a t i o n , p a s s i m . j  53 dividend proved ately  - v a l u a t i o n area.- R o b i c h e k and  that a c o m p o s i t e  define  as  an  of  cer-  i n a cash flow a p p r o a c h , c o n c u r s  with  adds-that growth in cash flows that.the  c h a n g e i s e x a c t l y ' o f f s e t by no  dividend  e f f e c t to  Bo th' L i n t n e r a n d argued  allowance for r i s  a l t e r n a t i v e "the u s e  d e p e n d e n t .of p a y o u t p o l i c y s o  the  adequ-  4  G o r d o n and  for  an  have  equivalents. ^ Walter,  vidend  rate cannot  a r iskle s s ' r a t e plus  and. have- s u g g e s t e d tainty  discount  Myers  external financing 4 9  hold.  R o b i c h e k and  c o n d i t i o n s but  M y e r s 'have  unequivocally  it i s u n a c c e p t a b l e under r e a l 48  ..... R o b i c h e k and  in  e f f e c t of a. d i -  t h e M i 1 l e r - M.o d i gl'ia n i h y p o t h e s i s  classical  m u s t be  world  re-  under  neo-  conclude  that  conditions..^  c i t . , pp. 6 7 - 8 6 . 49 • • ' James'E. Walter, "Dividend P o l i c y : Its i n f l u e n c e on t h e V a l u e 'of t h e E n t e r p r i s e , " The. J o u r n a l of F i n a n c e , v o l . X.VIII ( M a y 1 9 6 3 ) , pT~2'83 . 50  M y e r s , op.  • Lintner, "Dividends, Earnings, Leverage', S t o c k P r i c e s a n d t h e S u p p l y o f . ' C a p i t a l .to C o r p o r a t i o n s , " p p . 2 4 7 - 2 5 0 ; R o b i c h e k a n d M y e r s , o p. c i t . , pp. 5 2 - 5 4 . ' "  Market  c o m p o n e n t s ar.e n e i t h e r  tent i n t h e i r  expectations  rational nor consis-  and a t t i t u d e s .  f l u c t u a t i o n s , .tax c o n s i d e r a t i o n s , consumption expenditures, tain c o n t r o l ,  inability  value  certain patterns  others'. E v e n M i l l e r ;  tional  a planned  inertia,, desire  to b o r r o w  dends, are a l l possible  Market  against  r e a s o n s why of d i v i d e n d s  hold.  a reason  investors more  highly  and M o d i g l i a n i ' s - own  why  •  their  to m a i n -  future  contents . i n d i c a t e the i m p e r f e c t , flow  mation'and  r a t e of  hypothesis • .  divimay than  informaof i n f o r does not '• •  T h e i m p l i c a t i o n ' . . .'. i s th'at> w h e n t h e s e ' o r s i m i l a r market imperfections exist, dividend p o l i c y . d o e s not a f f e c t value and that c e r t a i n p a t t e r n s of d i v i d e n d p a y o u t s a r e w o r t h m o r e to i n v e s t o r s t h a n others.^1  51 Ibid.,  p. 5 4 .  .55, IV.  I M P O R T A N C E . OF One  vided  by  of t h e Miller  INFORMATIONAL  CONTENTS  m a n y s i g n i f i c ant. c ont r i b u t i o n s and  M o d i g l i a n i was  of t h e i r  studies.  They- s u g g e s t e d t h a t a c h a n g e i n s h a r e a change in dividends  informational a record  with, n u m e r o u s  partial  ciliation  that f o l l o w s  theory  the  of s t a b l e d i v i d e n d s  vidend,  ment p r o s p e c t s . evidence  of f u t u r e  Also,  bean  vestors  b e c a u s e of a l l e g e d  relative world  dividend  a c t i o n may  that s p e a k s The  louder  ignored,  be'a  tangible cash.  or  i m p a c t of d i v i d e n d s '  the  i n an  unare  misinterpreted, statement  words.  informational by  Di-  in-  written statements  t h a n a tho.usan'd  S o ganic h  three  con-  studies.  ,'  Soganich,  the  a u t h o r of a 1 9 6 7  observed price.changes very  prices  provide  m e a n s of m a k i n g a  is especially exemplified  dividend  may  invest-  d o u b l e t a x a t i o n and  spoken or  often i n c o n s i s t e n t , or  tents  e a r n i n g s and  of e x t e r n a l f u n d s , b u t  where  has  change  e x p e n s i v e m e a n s of i n f o r m i n g  costs  the  If a c o m p a n y  t h a t a c o m p a n y i s ab.le to g e n e r a t e may  certain  reflects  c h a n g e as' a  dividends  vidends  price  then changes i t s d i -  investor's i n t e r p r e t this  in management's view  high  and  recon-  empirical  merely  c o n t e n t s of d i v i d e n d s .  pro-  c h a n g e s and  had  g o n e up  Canadian  soon after  concluded.that,  for companies  in  study,  announced general,  increasing  their  ' 5 6 payments, panies  and.vice  (shares  creased  versa. ^  all fairly  or initiated  Of t h e t h i r t y - n i n e  actively  traded)  that i n -  payouts, twenty-two  s h a r e p r i c e i n the i m m e d i a t e  period after  ment, while  higher  before  reflected  however,  the m a r k e t ' s  announce  that those  'growth t r e n d  vestors' minds  iri" e a r n i n g s  might, have  been  past  outlook.  Those  p r i c e ,' i n g e n e r a l ,  had a  g r o w t h t r e n d , and t h e i r  move.,  s e e n by i n v e s t o r s ' as a f o o l i s h one.  dividends  in p r i c e ,  and' s a l e s i n r e -  r e i n f o r c e d i n the i n -  of s e v e n of t h e e i g h t c o m p a n i e s  omitting  h a d an  the i d e a that the d i r e c t o r s w e r e con-,  with a f a l l i n g  less favourable  involved.,  with a p r i c e rise  .of a c o n t i n u i n g f a v o u r a b l e  companies  movement  ' .  y e a r s ; .'thus, t h e d i v i d e n d  Stock  the  a n t i c i p a t i o n of a  a n a l y s i s o f t h e :companie.s  revealed  Impressive  vinced  higher  p r i c e i n the month  dividend' r a t e .  • Closer  cent  had a  the announcement. The e a r l y p r i c e  possibly higher  t h i r t y - t w o had-a  com-  reducing  e i t h e r d e c l i n e d o r was  a c l e a r r e f l e c t i o n ..of l o w e r  or  unchanged  earning  expec-  tations. Ashley John Ashley  ( 1 9 6 2)', u s i n g  over eight hundred, companies  52  Soganich , loc .  cit.  recent  on t h e New  data  from  York  Stock  57 Exchange  o r the A m e r i c a n S t o c k  Exchange,  that p r i c e s r e s p o n d e d s i g n i f i c a n t l y vidends  the m a x i m u m  occurred  percentage  change.  Again,  earnings  represented  responses.to  a static  category  position,  good news.  name  Ashley faster  F o r e x a m p l e , i n the that f e l l i n t o the  of ' ' d i v i d e n d s - i n c r e a s e d - . o r ' r e s u m e d , ' t h e  mean percentage news date  was  2.02.  corresponding  price  1.88,  increase after  after, two'weeks,  three  'dividends- d e c r e a s e d mean .percentage  price  d a y s of  2.3.0, a f t e r  Of t h e f o u r t e e n c o m p a n i e s  the c a t e g o r y . o f  or  one  included in omitted,'  increases  were:  - 5 . 5.5; - 5 . 5 1 . A g a i n , a d e c r e a s e ' i n a^ d i v i d e n d  a sure  sign,  especially  earnings, or s a l e s , poorer  repress  to b a d n e w s w e r e  s a m p l e of n i n e t y - n i n e c o m p a n i e s  was  ini-  i n the i m m e d i a t e p a s t .  also n o t i c e d that r e s p o n s e s  -5.02,  dividends  divi-  m a n a g e m e n t ' s o u t l o o k ' t o w a r d s the .future-,  t h e d e g r e e of s u c c e s s  month,  in price  m o r e a c t i o n b e c a u s e to i n v e s t o r s t h e y  whereas  than  change  a b o u t t h r e e d a y s a f t e r t h e n e w s of a 53  dend or e a r n i n g s  sented  to c h a n g e s i n d i -  a n d to a . l e s s e r e x t e n t to c h a n g e s i n e a r n i n g s ,  and'that  tiated  concluded  if supported  by  declining  t h a t t h e c o m p a n y -was h e a d e d f o r  da.ys . A s h l e y : ; op., c i t . ,  passim.  58 Barker Barker,,in  a s e r i e s of s t u d i e s  o b s e r v e d that stock stock only  dividends  cash dividend  increased  or split.was accompanied 54  increase.  Otherwise  t e n d e d to f a l l - . 5 A l h three  studies  dealt, with'the  d e e d , r e s u l t ' s of A s h l e y ' s  study  change r e a c h e s a m a x i m u m  afterwards' reverses  Harkavy  place byya .  the m a r k e t  sho^rt-run. In-  i n d i c a t e d that the i n about two w e e k s ,  towards the i n i t i a l p r i c e .  h a d t h e c o r r e c t a p p r o a c h .when he  segregated  d i v i d e n d - caus-ed • p r i c e e f f e c t s i n t o i n s t a n t a n e o u s long-term  and concluded  in hypothesizing  time  the.firm's 54  Quirin,.  1  has suggested  period^ involved.  change provides  they were d i f f e r e n t .  or  o n t h e s h a p e o f t h e f i r m s. m a r g i n a l  cost'of- c a p i t a l c u r v e , the  price  • •  0  and  and s p l i t s  p r i c e s s i xmonths a f t e r the event took i f the dividend  price  ( 1 9 5 6 to' 1 9 5 8 ) ,  the only  activities  • '' B a r k e r , _op_.  that the key i s  He s t a t e d t h a t a d i v i d e n d short-run  and t h e r e f o r e  i n f o r m a t i o n - about i s i n the s h o r t - r u n  cit. ,• passim . '5 5 • • The i n f o r m a t i o n a l i m p a c t of e x t r a d i v i d e n d s is not c l e a r , b u t , p r e s u m a b l y , they a r e c o n s i d e r e d a b o n u s f o r a g o o d y e a r a n d a r e .not- n e c e s s a r i l y t o b e expected again.  5 9  the  only f a c t o r capable  of a f f e c t i n g t h e c a p i t a -  ls fi l i g a t i o n r a t e on In t h e prospective long-run  the  the  common  shares."  intermediate-run, earnings market  from  new  rates adjust investments  expectations  gical  c o n c l u s i o n ""is.-that d i v i d e n d s  gible  e f f e c t on  and  p r i c e i n the  may  long-run,  impact.  Quirin,  op.  and  in.the  r i s k ' c h a r a c t e r i s t i c s . The have a whereas  b ' e c a u s e -of i n f o r m a t i o n a l c o n t e n t s  considerable  reflect  c o m p l e t e s i t s a d j u s t m e n t to  nings  short-run  to  c i t . , p.-  131  earlo-  neglii n the  they  have  CHAPTER V THE CANADIAN- INVESTORS' I. The  R E A C T I O N TO DIVIDENDS  PURPOSE  p u r p o s e of t h i s c h a p t e r  i s to d e t e r m i n e  the  C a n a d i a n i n v e s t o r s ' ' a t t i t u d e s t o w a r d s d i v i d e n d s of c o m p a n i e s ' . a t d i f f e r e n t s t a g e s of' g r o w t h , i n - d i f f e r e n t i n d u s t r i e s , a n d i n the o v e r a l l m a r k e t . terms,  In g e n e r a l  the d i v i d e n d t h e o r y s t a t e s - t h a t w h e n the  of r e t u r n on new c o r p o r a t e  investment is high,  rate the  d i v i d e n d r-'a t e . s ho u 1 d be l o w to;- m a x i m i z e ...the w e a l t h of shareholders.  T h i s study seeks  to d e t e r m i n e ' n o t . o n l y  whether i n v e s t o r s are r a t i o n a l in this r e g a r d , a l s o the e x t e n t ,  but  i f a n y , to w h i c h t h e y w o u l d h a v e  been  b e t t e r off i f t h e y had heede.d the d i v i d e n d t h e o r y i n the f i v e y e a r - p e r i o d , 1 9 6 1 t o 1 & 6.5 .. > II.  METHOD  1. A l l the d a t a w e r e t a k e n f r o m P o s t c o m p an y c a r d s f o r the y e a r s 1964 and  the' F i n a n c i a l  1961, 1962,  1965.''" C o m p a n i e s - w e r e i n i t i a l l y  1963,  chosen  from  1 T' h• e F i n a .n c i a l 'P o s t . C o r p o r a t i o n S e r v i c e , Financial Summary Cards , Toronto, Mac Lean-Hunter P u b l i s h i n g C o m p any L i m i t e d-, 1 9 6 6 .  1  61 The  F i n a n c i a l Post  characteristics  S u r v e y of I n d u s t r i a l s .  were that they  2  Required  f i t i n t o one of the  C a n a d i a n i n d u s t r i e s s u c h as f o r e s t p r o d u c t s a g e s , that they  be c o m p a n i e s - w i t h n e a r  •  normal'or  3  above-normal growth patterns, p a n y be p a i r a b l e . C o m p a n i e s Usee- A p p e n d i x  144.  or bever  E.for  so  and that each  selected, numbered'  the; l i s t s  of p a i r e d  firms.)  2.. P r i c e - e a r n i n g s a n d d i v i d e n d p a y o u t computed- f o r each c o m p a n y ' s  were cent  earnings  investor, figures All  more  stock.  were used  Since r e to t h e  earnings  ( 1 9 6 3 ( 1),' 1 9 6 4 ( 2),' 1-965 (3 ) ) .  and d i v i d e n d s  and s t o c k  ratios  significant  weighted average, per share,  earnings  splits  are considered  com-  dividends,  wer e adjusted but .company  f o r stock earnings  w e r e n o t put on.a n o r m a l i z e d " b a s i s ( s e e S e c t i o n of t h i s C h a p t e r ) . T h e  pr ice -ea rnings  4  ratio  V  was  9  T h e F i n a n c i a l P o s t S u r v e y of I n d u s t r i a l s , A S u r v e y of C a n a d i a n i n d u s t r i a l C o m p a n i e s P r e p a r e d - b y t h e E d i t o r s of t h e F i n a n c i a l P o s t , T o r o n t o , M a c L e a n H u n t e r P u b l i s h i n g C o m p a n y L i m i t e d , 19 66 .' 3  S u c h f i r m s w e r e r e q u i r e d to h a v e a r e c o r d of a net p r o f i t i n at l e a s t f o u r of.the. f i v e y e a r s and a p o s i t i v e trend- i n - e a r n i n g s and s a l e s o v e r the f i v e y e a r period. ' 4 T h e p a r t i c u l a r w e i g h t s w e r e c h o s e n on the b a s i s of the i n v e s t i g a t o r ' s o p i n i o n a r i s i n g f r o m c u r r e n t i n v e s t m e n t , a n d f i n a n c i a l l i t e r a t u r e on. the- a t t i t u d e s of C a n a d i a n - i n v e s t o r s .  6 2 c o m p u t e d by bitrarily age by  averaging 1965  This  The the  with  average  ratio  dividend ratios  more was  ratio  the  13,  .1966  the  payout  f o r 1961,  (date  the  ratio  was  1962,  aver-  computed  1963,  ( i f i t had  1964,  ratios. ^  to a p p r o x i m a t e  company  ar-  weighted  w e i g h t g i v e n , to r e c e n t  intended  a i m e d f o r by  the  January  c h o s e n ) c l o s i n g p r i c e by  earnings.  and  as  d i v i d i n g the  the  target  one)  i n v e s t o r w o u l d e x p e c t i n an  as  well  uncertain  futur e . 3. milarity  Firms  in a l l respects  similarity possible, with  were then p a i r e d  in payout but' o n l y  ratio:  are  as  data  and 6 follows:  b a s i s of s i and  P e r f e c t p a i r i n g was  c o m p a n i e s of t h e  same  to Graham'", D o d d , a n d  i m - '•  paired.  C o t t l e , ' the  reflected in  the.fi-  t h a t g o v e r n 'the. p r i c e - e a r n i n g s ' '  (a) g r o w t h of e a r n i n g s (b) , p r o f i t a b i l i t y ' ,  and.sales  dis- -  industry  records' were  c h i e f a n a l y t i c a l ; e l e m e n t s t h a t .are nancial  the  except payout'ratio  similar- growth and.other According  on  i n the  r a t e of r e t u r n on  ratio  past;  invested  capital; ( c ) - s t a b i l i t y of p a s t  earnings;  T h e m e t h o d of s e l e c t i n g w e i g h t s w a s identical to t h a t , u s e d f o r w e i g h t e d e a r n i n g s p e r share. 6  Graham  et a l . , 1 9 6 2 ,  op.  c i t . , p.  230.  63 (d) t h e d i v i d e n d (e)  financial  Therefore,  r a t e and  strength,  appropriate  for. e a c h  pairing  (with growth  criterion).  or credit  standing.  growth figures  e a c h of t h e s e e l e m e n t s culated  record;  or ratios f o r  (except dividends) were  c o m p a n y and  used  cal-  as the b a s i s f o r  i n e a r n i n g s per share., the  Growth figures  and  ratios  main  u s e d a r e as .  follows: , (a) a v e r a g e for  the f i v e  annual growth  year period,  (b) a v e r a g e five  year period, (c)  after  total invested  1961  current  two  trend  (a) rate nomy  stocks); stable,  in earnings per share;  ratio. of t h e f i n a n c i a l  companies,  by d i v i d i n g t h e . 1 9 6 5  by- t h e t o t a l a s s e t s  growth  and  classification: very  ability-was measured  Pairs  same  1965;  c a p i t a l (bonds  In t h e c a s e of e a c h  4.  i n s a l e s f o r the  t a x p r o f i t - ( 1965-) a s a p e r c e n t a g e o'f  stable,, or unstable  profit  to  share  t o 19 6.5;  annual growth  (d.)' s u b j e c t i v e  (e)  1961  in earnings, per  of f i r m s  i n the s a m e  profit-  a f t e r tax'  year.  were c l a s s i f i e d  into  one.of  classes: average  that was  growth: companies  not s i g n i f i c a n t l y  average;  showing  different from  a  growth  the  eco-  64 (To) s u p e r i o r  growth: companies  g r o w t h r a t e t h a t was economy  Average  and  price-earnings  approximate  p u t e d f o r low firms,  significantly higher  than  a the  average.  5; ratios,  showing  dividend  p a y o u t and  for industries,  high  and  1  ratios, yields  payout werecom-  payout groups for a l l  f o r "growth ' c l a s s e s  within  certain .industries . 6.  Similarly,  1  the  five  1966) and  year period  and  average', y.early a p p r e c i a t i o n (January  13,  as, a p e r c e n t a g e  vestment were computed for high 7.. T h e  entire  process  was  e x h i b i t i n g g r o w t h f a r a b o v e the .8.' A s Vof  this  '"chapter),  t h a n 35  9. - A l s o p r o a c h , the  per as  and  low  13,  dividends  original inpayout  groups.  for. f i r m s  economy average. ^ of t h e  entire  with a payout  approach  process  (see  was  re-  difference  cent.  a result  process  were, e x c e e d i n g l y ratio.^  firms  the  of: t h e  repeated  a r e s u l t of c r i t i c i s m  peated for paired greater  to J a n u a r y  r e t u r n to s t o c k h o l d e r s , ( i n c l u d i n g  appreciation)  Section  1961  over  was  similar  of a c r i t i c i s m repeated  of t h e  for companies  in a l l respects  except  apthat payout  •  S u c h e x c e p t i o n a l g r o w t h m e a n s a t l e a s t a n 18. per cent a v e r a g e y e a r l y growth rate i n earnings per s h a r e f o r the p e r i o d 1961.to 1965. T a b l e s i n A p p e n d i x E l i s t the p a i r e d f i r m s e a c h of t h e f o u r s t u d i e s r e f e r r e d to a b o v e . 8  for  65  III. R e s u l t s are VI.  RESULTS  l i s t e d in Tables III,  I V , V , and  TABLE III RESULTS OF PAIRING 144COMPANIES TA BULATED BY INDUSTRY Industry and growth category  Sample si2e  Foodstuff sup. gr. av. gr. average' Public utility sup. gr. 'av. gr. average Forest product sup. gr. av. gr. average Non-ferrous* metal Trust co.* Merchand.* Oil & gas* pipeline Gas & oil* (integrated)Textile* Iron & steel* Chemical* Construction* Electrical* Beverage* All industries sup. gr. av. gr. Overall averages  Data for high payout companies Average Average Weighted Approx. Average growth weighted priceprice payout, earnings yield in aain, 1961earnings 19611965 per 1966, share as %age of original price  Data for low payout companies Average Average Weighted A pprox. Ave rage Return Return (dividend growth weighted priceyield ' price (dividend & aain) in payout, earnings % gain, & gain) • as %age earnings 19611961- as %age of 1965 of per 1 original, share as %age original investment of .investment original price  14 8 22  .22 .02 .15  58 42 52  13.7 11.9 13.1  4.2 3.5 3.9  13 7 10  81 44 68  .29 '.'03, . .20  31 16 . 26  14.5 14.1 14.4  12 8 , 20  .19 .03 .13  61 66 63  18.3 20.6 19.2  3.3 3.2 3.3  12 10 11  79 67 74  .17 .04 • .12  33 34 34  19.2 1.7 16.6 . 2.0 18.2 1.9  10 6 16 8 14 14  . 11 .03 .08 •• .19 ' .08 . 14  61 61 61 49 76 52  13.1 13.4 • 13.2 15.0 23.3 19.4  4.7 4.6 4.6 3.3 3.3 2.7  9 2 5 17 8 9  67 4 43 111 44 56  . 17 '.02 .12 .22 . 10 .14  31 43 • 35 18'' 51 27  9.3 16.4 12.0 15.7 17.5 18.3  10  .12.  67  20.3  3.3  10  43  18. 1  4 12 6 • 6 4 2 6  .05 .18 .37 .15 .23 .22 . 14  53 43 60 • 56 33 33 50  17.3 11.6 16.4 14.5 11.9 25.6 14.4  3.1 3.7 3.7 3.9 2.7 1.3 3.5  0 25 11 6 26 27 20 '  100 44  .19 .03  56 58  16.8 15.9  3.3 , 3.6  T  6  72 . 11 158 70 51 154 134 116 88 48 "  57 3.4 76 .14 16.5' 11 144 *These industries did not have large enough samples to warrant a tabular breakdown into growth and average growth categories.  .12 .07 .41 .22' .17 .35 ' ' .30 .14  34 2.1 1. 1 - 9 1.8 24 • 28 26 27  3.3 2.6 .2.9  183 59 134 151 143 148  14 14 14' 2 3 1/1 2.9 5 1.5 12 .  82 81 82 119 42 68  2.4  103  10  5 6 45 18 11 16 • 28  18.0 .3 . 8.1 ' .7 13.3 3.4 17.6 1.0 16.0 .7 16.3' 1.0 15.6 1.8  14 71 52 • 270 118 21 ' 42 6 44 ' 229 29 148 37 196  .24 .03  28 30  15.6 - 15.0  1.8 2.0  24 13  138 81 •  .17  29  15.4  1.9  22 -  125  T A B L E IV RESULTS  O F P A I R I N G 56 C O M P A N I E S  EXHIBITING E X C E P T I O N A L  GROWTH  Sample size  Data for high payout companies Average Average growth weighted In payout, 1961earnings 1965 per share  weighted pricee arnlngs • .  Data for low payout companies  'AVSr'ag'e Average Approx. Average Keturn growth weighted yield price (dividend payout, In gain, & gain) % 19611961- as ttage earnings 1965 per 1966, of share as %age "original of Investment original price  weighted priceearnings  Approx. yield %  Average price gain; 19811966,  as %age of original price  Keturn (dividend . & gain) as »age of original Investment  TABLE V RESULTS OF VERY C LOSELY PAIRING 54 COMPANIES Sample size  Data for low payout companies  Data for high payout companies Average Average Weighted Approx. Average growth weighted price price- yield payout, earnings in gain, 1961earnings 19611965 1966, per snare as %age of original price'  40 14 54  .19 .02  53 51  17.1 14.1  3.1 3.6  52  16.2  3.2  Return Average Average Weighted Approx. Average (dividend growth weighted price price- yield Si gain) in payout, earnings gain, as *age earnings 19611961of 1965 per .1966, original share Investment of original price  85 61 12  78  .19 .02  Return (dividend ,& gain) as *age of original investment  28 24  17.7 12.7  1.8 1.9  24 12  125 75  27  16.2  1.7  20  107  TABLE VI RESULTS OF PAIRING 48 COMPANIES, EACH COMPANY WITHDtA PAIR HAVING A PAYOUT DIFFERENCE OF OVER 35 PER CENT Industry and growth category  Sample size  Data for high payout companies Average Average Weighted growth weighted price in payout, earnings earnings 1961per 1965 share  Data for low payout companies  Approx. Average price yield gain, 19611966, as %age of original price  Return Average Average Weighted Approx. Average (dividend growth weighted p rice- yield price & gain) in gain, payout, earnings % as 96age 1961earnings 1961of per 1965 original share investment of original price  Return (dividend & gain) as %age of . original investment  All industries sup. gr. av. gr. Overall average  17 7  .19 .03  24  .15  16.9 15.1 62  16.3  3.6 4.4 3.8  15 5  42  .21 .02  14 23  15.1 13.3  1.0 1.7  23 18  135 103  12  80  .16  17  14.6  1.2  21  125  •  71  •' I V . D I S C U S S I O N O F R E S U L T S T h e a t t e m p t to i s o l a t e g r o w t h was not successful, earnings  as e x e m p l i f i e d by the a v e r a g e  entirely  growth in  p e r s h a r e f o r e a c h of the two p a y o u t ; g r o u p s .  The b a s i c q u e s t i o n that a r o s e price- earnings  ratios  was w h e t h e r  the h i g h  c o r r e s p o n d i n g to l o w p a y o u t  g r o u p s -were . - p a r t i a l l y c a u s e d - b y a s m a l l  increment  of g r o w t h t h a t c o u l d not be i s o l a t e d . B e c a u s e  the,  g r o w t h d i s c r e p - e n c y w a s - r e l a t i v e l y s m a l l and, v a r i e d i n c o n s i s t e n t l y , the l o g i c a l c o n c l u s i o n was t h a t  the  s m a l l a m o u n t of n o n - i s o l a t e d g r o w t h had a m i n o r i n fluence. T h e r e m a i n i n g p r o b l e m was w h e t h e r r a t i o was the c a u s e effect. firms  the  and ..the . p r i c e - e a r n i n g s r a t i o ,  The c o n v e r s e appears u n l i k e l y unless w i t h low p r i c e - e a r n i n g s , r a t i o s  m o r e f o r e x p a n s i o n . A n - e x a m i n a t i o n of the however,  showed.no apparent  the s a l e of c o m m o n s t o c k .  Furthermore, 9 was a p e r i o d of • h i g h s t o c k p r i c e s .  the  those  were less  to f l o a t s t o c k and. c o n s e q u e n t l y w e r e f o r c e d to  histories,  payout  able retain  company  difference 1961 to  B u r r e l concurs with this r e a s o n i n g in his s t u d y , " R e l a t i v e V a l u e of E a r n i n g s : R e t a i n e d and D i s t r i b u t e d , " p . 2 9 ..  in  1965  72 T a b l e I I I s h o w s r e s u l t s f o r the i n d u s t r y g r o u p i n g s as w e l l as f o r a l l the s u p e r i o r - g r o w t h f i r m s , a l l the a v e r a g e - g r o w t h f i r m s , neral,  and a l l f i r m s .  In g e -  the s t u d y i n d i c a t e d t h a t f o r i n d u s t r i e s ,  as c h e m i c a l and n o n - f e r r o u s low.payout r a t i o ,  attach a greater  m e t a l , w h i c h (1) h a v e a  (2) a r e at a b e g i n n i n g s t a g e i n  g r o w t h and d e v e l o p m e n t , recognized future  such  and (3) n e e d ' f u n d s - f o r  g r o w t h and e x p a n s i o n ,  clearly  investors  s i g n i f i c a n c e (that i s , h i g h e r p r i c e -  e a r n i n g s ) to the l o w e r p a y o u t f i r m s .  T h u s , when f u -  ture growth is c l e a r l y , p r e d i c t e d , i n v e s t o r s s e n s i b l y t"b t h e i r own e x p e c t a t i o n s  react  of g r e a t e r  appre-  c i a t i o n a c c r u i n g to low p a y o u t f i r m s i n s p i t e of h i g h e r d i v i d e n d y i e l d s of the h i g h p a y o u t f i r m s  Conversely,  w h e r e the i n d u s t r y i s ' - e s t a b l i s h e d , ' i s c y c l i c i n n a t u r e , h a s p a i d a r e l a t i v e l y h i g h p a y o u t i n the p a s t , a less c e r t a i n , less d e s i r a b l e future of the f o r e s t tors  and.has •  (as i n the  p r o-duc t s . andVt e x t i l e i n d u s t r i e s ) ,  case inves-  d e s i r e a h i g h p a y o u t e v e n w h e n the i n d i v i d u a l  has e x h i b i t e d a b o v e a v e r a g e With banks,  firm  growth c h a r a c t e r i s t i c s .  w h e r e h i g h p a y o u t has b e e n t r a d i t i o n , and  to s o m e e x t e n t  with trust  companies, investors  clearly  d e s i r e f i r m s w i t h a h i g h e r p a y o u t r a t i o i n s p i t e of  73 . growth.  ''  •  Surprisingly, ficance  i n v e s t o r s" a 11 a c h e d g r e a t e r  to l o w d i v i d e n d s i n the c a s e  public u t i l i t i e s and,  similarly,  signi-  of s u p e r i o r - g r o w t h  a greater  significance  to h i g h e r d i v i d e n d s i n the c a s e of a v e r a g e - g r o w t h blic utilities, vestors those  are  demonstrating that, for u t i l i t i e s ,  r a t i o n a l . Industry generalizations  d e s i g n a t e d a r e. d i f f i c u l t  study r e s u l t s  to m a k e .  i l l u s t r a t e d the d i f f i c u l t y  c l u s i o n s about i n v e s t o r s ' a t t i t u d e s i n d i f f e r e n t - i n d u s t r i e s on t h e ' . b a s i s of c o m p a n i e s . "  In f a c t ,  puin-  beyond the  in drawing con-  towards  dividends  of a s m a l l  sample  •  T h e p o s i t i v e and s t a t i s t i c a l l y s i g n i f i c an t r e l a tionship between p r i c e - e a r n i n g s  and p a y o u t  ratios,  e x h i b i t e d - w h e n b o t h the d a t a ' o n the f i f t y  superior-  g r o w t h p a i r s and d a t a on the t w e n t y - t w o  average-growth  p a i r s were a v e r a g e d . same  ( T a b l e I I I on page 6 7 ) , l e d to  c o n c l u s i o n as t h a t of  the  Barrel.  I n v e s t o r s want c a s h d i v i d e n d s e v e n w h e n i t c a n be d e m o n s t r a t e d t h a t the r a t e of r e t u r n on new c o r porate i n v e s t m e n t is high..  T h i s s t a t e m e n t ..in. r e f e r e n c e to b a n k s was m a d e o n - t h e b a s i s of o b s e r v a t i o n and the b a n k s ' a d v a n c e d p o s i t i o n i n ' the d e v e l o p m e n t c y c l e . N o n e of the b a n k s w e r e p a i r e d b e c a u s e of t h e i r s i m i l a r r a t i o s . B u r r e l , " R e l a t i v e • V a l u e of E a r n i n g s : R e t a i n e d and D i s t r i b u t e d , " p . 2 9 .  74 The r e s u l t s  of p a i r i n g f i f t y S s i x . c o m p a n i e s e x h i b i t i n g  e x c e p t i o n a l g r o w t h ( T a b l e I V .on. page 68) and the r e - . s u i t s of p a i r i n g f o r t y - e i g h t c o m p a n i e s ,  each within a  p a i r h a v i n g a p a y o u t d i f f e r e n c e , of o v e r 35 p e r ,cent.^ ( T a b l e V on page 6 9 , ) a l s o s u p p o r t t h i s s a m e c o n c l u s i o n . j  However,  to m a k e a g e n e r a l o b s e r v a t i o n out of c o n t e x t -  of a p a r t i c u l a r v i n d u s t r y i s -per.n.aps m i s l e a d i n g . T h e results  we.re d e e m e d e v e n l e s s s i g n i f i c a n t by  of the f o l l o w i n g s t u d y ' . " After  results  .',  carefully pairing fifty-four  e a c h of a p a i r h a v i n g - e x t r e m e l y c l o s e ( T a b l e V I on page 70), r e s u l t s  companies',  characteristics./-  c o n t r a d i c t o r y to the  going were obtained. • Investors  attached  a higher  foreprice  to g r o w t h c o m p a n i e s w i t h "a lo w pay out , and v i c e , v e r s a . Furthermore,  average  g r o w t h in., e a r n i n g s p e r  was i d e n t i c a l f o r b o t h p a y o u t grb'.ups. significant outcomes carefully  T h u s , two v e r y  w e r e t h a t c o m p a n i e s m u s t be v e r y  paired in studies  t r a r y to r e s u l t s  share  of t h i s . n a t u r e  of p a s t s t u d i e s ,  and t h a t ,  i n v e s t o r s are  rational  i n t h e i r a p p r o a c h to'' d i v i d e n d p o l i c y ( t h a t i s , t h e y s i r e s h a r e s of a c o m p a n y t h a t r e t a i n s r e t u r n on t h o s e e a r n i n g s  earnings  is demonstrated  T h e tax a d v a n t a g e  con-  de-  i f the  to be h i g h ) .  m a y be. a c o n t r i b u t i n g  reason.  . 7 5 A. c o r o l l a r y i s t h a t c e r t a i n g r o w t h f i r m s m a y  in'crease  the m a r k e t p r i c e of t h e i r s t o c k i n the l o n g - r u n by lowerin'g their d i v i d e n d . .  •  T h e ' r e s u l t s -of the. c l o s e l y p a i r e d s a m p l e deemed more s i g n i f i c a n t because comparative' measures  g r o w t h and  were  other  were almost c o m p l e t e l y i s o l a t e d .  T h e c o n t r a d i c t i o n - b e t w e e n the ' r e s u l t s  of the two- s a m p l e s  p o i n t s to the q u e s t i o n a b i l i t y of B a r r e l ' s , c o n c l u s i o n s and the m e t h o d as he a p p l i e d i t . T h e e x a c t m e t h o d  Barrel  u s e d to p a i r was not d i s c u s s e d , but the f a c t t h a t he used only a growth measure criteria  and the s a m e i n d u s t r y  and the f a c t t h a t he s t a r t e d  with eighty  stocks  and w a s a b l e to p a i r a l l e i g h t y of t h e m i n d i c a t e s his p a i r s  as  that  w e r e e v e n l e s s c lo s e l y . p a i r e d t h a n t h o s e  in  the l a r g e s a m p l e of t h i s s t u d y w h e r e o n l y 144 c o m panies  out of m o r e t h a n 25-0 i n i t i a l l y c h o s e n w e r e  pair-  able. A s a r e s u l t of a p p l y i n g a t e c h n i q u e u s e d by • '• H a r k a v y , 13 the a v e r a g e y e a r l y - p r i c e . a p p r e c i a t i o' n as :  w e l l as the r e t u r n  ( d i v i d e n d s p l u s g a i n ) on the  n a l i n v e s t m e n t f o r the p e r i o d 1961 to 1965 w e r e to be h i g h e r i n a l l c a s e s f o r l o w p a y o u t g r o u p s T a b l e s I I I , I V , V , and V I , p a g e s 67 to 70) .  Harkavy,  ojp. c i t . , p p .  290-296.  origifound (see  76 Although Harkavy as a m u t u a l  d i d n o t a t t e m p t to i s o l a t e  c a u s a l agent, the method • i n this  did b u t , as-mentioned successful.  of t h e l o w p a y o u t  study  o n p a g e 71 w a s n o t e n t i r e l y  H e n c e , .only p a r t  p a r t ) of t h e s u p e r i o r  tained  growth  (but l i k e l y  long-term price  group  the m a j o r  appreciation  c o u l d be a t t r i b u t e d  to r e -  earnings-. N o n e t h e l e s s , l o n g - t e r m gains a r e  m o r e apt. t o a c c r u e to s h a r e h o l d e r s o f l o w p a y o u t companies  that "exhibit a t l e a s t average, g r o w t h . V. C R I T I Q U E  OF  METHOD  ' . Burr'el -stated: ... t h e m o s t v a l i d c r i t i c i s m ... i s t h a t i n some c a s e s the p a i r i n g d i d not i n v o l v e a r e a l l y high payout • a g a i n s t a r e a l l y ^ l o w payout s t o c k but r a t h e r a ' low payout p a i r e d , with a much lower payout c o m p a n y . ^ • .. Similarly, cent may investors earnings overcome  a difference  i n p . a y o u t s o f 10 t o 20 p e r  n o t be s i g n i f i c a n t  e n o u g h i n t h e m i n d s of  to h a v e a n y m e a n i n g f u l e f f e c t on the p r i c e ratios.  T a b l e V , p a g e '69, i s c o n s t r u c t e d - t o  t h e s e two  criticisms.  B a r r e l , " R e l a t i v e V a l u e of E a r n i n g s : R e t a i n e d a n d D i s t r i b u t e d , •" ..p . ' .2 9 .  Certain analytical earnings  77  elements governing  the p r i c e -  r a t i o a r e d i f f i c u l t to. q u a n t i f y . T h e s e i n c l u d e :  (a) q u a l i t y (b) n a t u r e  of m a n a g e m e n t ; and p r o s p e c t s  of the i n d u s t r y ;  (c) c o m p e t i t i v e p o s i t i o n a n d i n d i v i d u a l pects  of the i n d u s t r y .  A c o m m o n and p a r t i a l l y . . v a l i d factors  s h o u l d be c o n s i d e r e d  criticism  was  that  factors  a l r e a d y have  on the f i n a n c i a l  company has. i f new  that  w h i c h show' t o a c e r t a i n  extent  a n d how- g o o d a m a n a g e m e n t t h e  Their argument  w o u l d not h o l d ,  dus t r y ) had m a d e . p a s t  results  irrelevant  drug-In-  f o r the  f u t u r e . S i m p l e o b s e r v a t i o n r e v e a l e d , t h a t the'se s i t u a t i o n s , a r e u n u s u a l , i n C a n a d a ' whe-re m a n y within primary A  recent.and  has shown-that v e r y earnings  how-  m a n a g e m e n t had r e p l a c e d the o l d or i f  i n n o v a t i o n i n an i n d u s t r y ( f o r e x a m p l e , the  exist  these  exerted 'considerable influence  data  how g o o d a b u s i n e s s  these  s o m e h o w i n the p a i r i n g  of c o m p a n i e s . . G r a h a m , e t • a 1. h a v e c o u n t e r e d  ever,  pros-  per share  Graham  and not'.highly d y n a m i c rather startling  latter  firms industries.  A m e r i c a n study  little-correlation i n one  '  existed between  g i v e n p e r i o d and  et a l . , 1 9 6 2 , o _ p . c i t . , p .  earnings  231  78 per  stare  sions  i n the s u b s e q u e n t p e r i o d .  imply  the b a s i s  that c o m p a n i e s  of p a s t  16  c a n n o t be c o m p a r e ' d on  growth i n earnings  p e r s h a r e and  that g r o w t h i n , e a r n i n g s  per share  capacity  or has l i t t l e  of m a n a g e m e n t  payout r a t i o ,  These, conclu-  profit margin,  d o e s not. i n d i c a t e r e l a t i o n s h i p to  and other  variables.  A n o t h e r - r e c- e n t A m e r i c a n "study',' o n t h e f a c t o r s i n 1  :  f l u e n c i n g the p r i c e - e a r n i n g s expectation than past  thod  concluded  of f u t u r e g r o w t h - w a s m o r e 17 • •  records.  The extent  of t h e s e t w o s t u d i e s extent  ratio,  of t h e v a l i d i t y  used f o r this  are valid^in  significant  to w h i c h the r e s u l t s Canada  s i g n i f i e s the  of c e r t a i n ' ^ c r i t i c ism's o f - t h e  c a u s e of l a c k of s u i t a b l e i n f o r m a t i o n , s i z e of t h e s a m p l e s t o g e t h e r  large numbers' would by  me-  study.  A l t h o u g h e a r n i n g s . were not n o r m a l i z e d  large  that  tend  be-  the r e l a t i v e l y  w i t h t h e 'law of  to swamp, any e f f e c t c a u s e d  d i f f e r e n t a p p r o a c h e s u's'ed i n ' c a l c u l a t i n g e a r n i n g s .  ' 1-6 J . E . M u r p h y , J r . , " R e l a t i v e G r o w t h of Earnings per Share," Financial Analysts Journal, v o l . 2 2 ( N o v e m b e r - D e c e m b e r F9 6 6 ) , p p . 7.3 - 7 6 . • 17  • • J . E . H a m me l a n d D. A. Ho d e s , " F a c t o r s • Influencing P/E M u l t i p l e s , " F i n a n c i a l A n a l y s t s Jour n a l , v o l . 2 3 ( J a n u a r y - F e b r u a r y I y b\77 , p p . y (J - 9 2~.  79 S u r v e y s of i n v e s t o r o p i n i o n have i n d i c a t e d that d i v i d e n d s  i n the U n i t e d  are seldom  a  States  considera-  18  tion i n the p u r c h a s e not  of s t o c k .  But, this  a d i r e c t c r i t i c i ' s m of t h e m e t h o d u t i l i z e d  study.  Investors'  cessarily may  statements and actions  samples  be p e c u l i a r t o a n a r e a .or to a t y p e ' o f i n v e s t o r .  firm's  years  is a relatively  short  vestors  cases  do). This  because five  this  may  criticism  criteria,  was p a r t i a l l y  industry  patterns.  i n this  necessary  companies  i nthe  a r e a f f e c t e d by the s a m e b u s i n e s s  The p r i m a r y  year period  .overcome  not j u s t g r o w t h i n e a r n i n g s ,  t h u s have, r e l a t i v e l y  panies  in a  be p r e c i s e l y w h a t i n -  were used f o r p a i r i n g and because same  period  h i s t o r y on w h i c h to b a s e a g r o w t h t r e n d ( a l -  though i n many  the  i n this  a r e not n e -  t h e s a m e . F u r t h e r m o r-e , c e r t a i n  Five  and  outcome i s  the same  long-term  growth .  r e a s o n for- s e l e c t i n g a f i v e  study, however,  historical  was the l a c k of  d a t a f o r m a n y of t h e c o m -  examined..  Friend  cycle  and Puckett,.  op. c i t . ,  p. 6 5 8 .  CHAPTER  VI  DIVIDEND. DECISION IN The the  p u r p o s e of t h i s  dividend  ''chapter  which,are 'considered  j e c t i v e l y by the d e c i s i o n m a k e r s  are  to f i f t y  examined.  veloped.and three  criticized  of r e g r e s s i o n  making  dividend  companies,  basis,  a r e put i n the f o r m  which- a r e t e s t e d on a p p r o -  i n o r d e r , t o e l u c i d a t e -the t a s k o f  decisions I.  Se-  by the  to e s t a b l i s h , on. a. l o g i c a l  equations  sub-  m o d e l i s then de-  models. A l l models  C a n a d i a n data  sent  d i r e c t o r s of C a n a d i a n  Lintner's dividend  dividend  priate  are discussed.  t h e r e s u l t s of t h e q u e s t i o n n a i r e ,  investigator  the l e g a l  c o n s t r a i n t s on the d e c i s i o n and  discretionary- elements  condly,  i s to i n v e s t i g a t e  decision in practice. First,  elements which place the  PRACTICE  in Canada.  CONSTRAINTS  A f i r m must consider  .certain l e g i s l a t i v e and  c o n t r a c t u a l c o n s t r a i n t s to a r r i v e a t t h e d i v i d e n . d d e cision. states  Section  1 6 0 o f T he C a n a d a C o r p o r a t i o n s  that d i r e c t o r s may  make  laws f o r the d e c l a r a -  t i o n a n d p a y m e n t of d i v i d e n d s . ; h o w e v e r ,  The C a n a d a C o r p o r a t i o n s P r i n t e r ~ 1 9 p T 9~9~;  Act ^  Section  Act , Ottawa , Queen ' s  81 83  (2).  s t a t e s t h a t no d i v i d e n d  should  be  declared  u n d e r the f o l l o w i n g c o n d i t i o n s : when the c o m p a n y i s i n s o l v e n t , w h e n i t w o u l d be r e n d e r e d i n s o l v e n t , o r ' ' 3 w h e n i t s c a p i t a l w o u l d be i m p a i r e d . If d i r e c t o r s p a y a dividend  contrary  to S e c t i o n  83 ( 2 ) t h e y a r e j o i n t l y  l i a b l e f o r a l l t h e d e b t up t o t h e a m o u n t o f  dividends  plus  protests  the  interest. dividend  A n y d i r e c t o r who  payment i s exonerated from  These  legal restrictions  b i a s i n t o the d i v i d e n d tive years  the  inject  conservative  I n d i c a t i n g the present  a n d the s t a t u r e of the f i r m ' s cash flow,  at t i m e of d i v i d e n d  porate  that may  estimates  c a p i t a l , and  receivable  debts) and f i n a l  good, Inventory  o v e r s t a t e m e n t of p r o j e c t e d  payment,  be i n a c c u r a t e .  t i o n of a c c o u n t s  underestimation  state  i n d i c a t i n g the a n t i c i p a t e d  s t a t e of s o l v e n c y  cash  values  will  receipts.  incor-  Overvalua-  (underestimation  of l i a b i l i t i e s . f o r  of b a d cause  Similarly,  warranties  and  w i l l c a u s e u n d e r s t a t e m e n t , of p r o j e c t e d  cash disbursements.  2  a  when the c o m p a n y , i s b u i l d i n g up i t s e q u i t y .  projected  guarantees  liability.  p o l i c y e s p e c i a l l y i n the f o r m a -  Both the balance sheet, of s o l v e n c y  officially  Therefore,  management  should  Ibid.. , pp. 56- 58.  3  •  S u b j e c t t o ( 4 ) w h i c h e x c l u d e s f i n a n c i n g com-' p a n i e s a n d c o m p a n i e s w i t h 75 p e r c e n t o f a s s e t s o f a wasting nature.  82 allow not  a m a r g i n .for e r r o r to i n s u r e  rendered The  retained  that the f i r m i s  insolvent.  creditor, i n order earnings  to p r e v e n t a r e d u c t i o n i n  a f t e r l e n d i n g on the b a s i s  t i o n of s u c h e a r n i n g s , in the loan t r u s t deed.  may  of p r o t e c -  put an a p p r o p r i a t e  clause  For example,  A l b e r t a D i s t i l l e r s , L i m i t e d , 6% S i n k i n g - F u n d ^ D e b e n t u r e s , S e r i e s A , D u e F e b r u a r y 1, 1 9 7 9 . P a y m e n t of d i v i d e n d s o r o t h e r d i s t r i b u t i o n s on • c o m m o n "stock i s l i m i t e d to n e t p r o f i t s a f t e r J u n e 1 , 1958. " 4  II.  DISCRETIONARY  CONSIDERATIONS  Lintner After of c o r p o r a t e  considerable .research dividend  on the d e t e r m i n a n t s  po l i e y ' L i n t n e r s u g g e s t e d t h a t t h e  following i n t e r r e l a t e d c h a r a c t e r i s t i c s or factors i n 5 • ' fluenced  dividend  policy:  (1) t y p e o f i n d u s t r y : p r o d u c e r g o o d s , :  goods, durable  or non-durable  consumer  go:ods;  C . C . P o t t e r , F i n a n c e a n d B u s i n e s-s A d m i n i s t r a t i o n i n C a n a d a , S c a r b o r o u g h " 0 n t . , P~r e n t i c e - l i a l l of C a n a d a Ltd-. , - 1 9 6 6 , p. 3 1 1 . 4  5  :  L i n t n e r , "The D e t e r m i n a n t s of C o r p o r a t e S a v i n g s , " pp. 2 4 8 - 2 5 2 ; L i n t n e r , " D i s t r i b u t i o n of I n - , c o m e of C o r p o r a t i o n s A m o n g D i v i d e n d s , R e t a i n e d • E a r n i n g s and T a x e s , " pp. 99-102; B i c k s l e r , op. c i t . , p. 4 5 . . .. ' —  83 (2) s i z e o f c o m p a n y ; (3) g r o w t h i n s a l e s a n d (4) s t a b i l i t y  earnings;  or variability  (5) f r e q u e n c y  of s a l e s o r  of c h a n g e s i n d i v i d e n d  (.6) a v e r a g e p a y o u t  earnings;  rates;  ratio;  (7) a v e r a g e p r i c e e a r n i n g s  ratio;  (8) b a l a n c e s h e e t a n d " f u n d f l o w  liquidity;  (9) c a p i t a l , s t r u c t u r e ;  ment  u s e of s t o c k  (11)  relative  personal  s i z e of s t o c k  splits,  and  o w n e r s h i p by  interviews  of k e y - c o r p'b r a t e  f i n a n c i a l a n a l y s i s of a l l ' t h e p u b l i s h e d  twenty-eight red  dividends,  extras; manage-  and other' c o n t r o l 'groups . '  After and  (10)  large  cluded  companies  listed  chosen from  industrial  t h a t the. m a j o r  d a t a of  a l i s t of six' h u n d -  corporations,  dividend  executives  Lintner  d e c i s i o n w a s : Do  n e e d t o c h a n g e t h e a m o u n t of d i v i d e n d  we  conwe  are presently  6 paying?  Most corporation  executives  interviewed  that s e t t i n g the d i v i d e n d  amount  not  i n the f u t u r e was  have  :  t o be i n c r e a s e d  foremost  r u l e of d i v i d e n d  sample,  Lintner concluded  the  would  the f i r s t  and  p o l i c y . I n s p i t e of h i s b i a s e d that c u r r e n t  m a j o r fac'tor i n d e c i d i n g Lintner,  at a l e v e l w h i c h  felt  net p r o f i t  was  w h e t h e r o r n o t to c h a n g e  Distribution  of I n c o m e , " p. 9 9 .  • 84 the  present  Lintner ratio  dividend  suggested,  level.- This  a m o u n t of c h a n g e ,  d e p e n d e d on the t a r g e t  a n d t h e s p e e d of a d j u s t m e n t f a c t o r , b o t h o f  w h i c h , i n t u r n , d e p e n d e d on a n u m b e r 7 namely:  of f a c t o r s ,  -  '  (1) e a r n i n g s a n d g r o w t h p r o s p e c t s the  payout  f o r both  f i r m ' a n d 'the ' i n d u s t r y ; (2) the.-.c-ycle of i n v e s t m e n t  opportunities,  w o r k i n g c a p i t a l n e e d s , and' h i s t o r i c a l i n t e r n a l fund  j u d g e m e n t of  flows;  (3) m a n a g e m e n t ' s v i e w t u d e s on m a r k e t a p p r e c i a t i o n (4) d i v i d e n d  policies  of'shareholders' o'r c u r r e n t  atti-  dividends;  of c o m p a r a b l e f i r m s ; "  (5) f i n a n c i a l p o s i t i o n of 'the c o m p a n y , a c c e s s 8 '• to c a p i t a l m a r k e t s , and p r e f e r e n c e f o r p a r t i c u l a r 9 • t y p e s "of f i n a n c i n g ; ' , ' I b i d . •, p . 1 0 4 ; B i c k s l e r , op', c i t . , p . 48 . 8  I n v e s t o r s m a y a t t a c h a g r e a t e r d e g r e e of r i s k to a f i r m n o t y e t p r o v e n b y t i m e s o t h a t t h e f i r m m a y find.greater d i f f i c u l t y or cost i n obtaining c a p i t a l f r o m i n v e s t o r s r a t h e r than f r o m r e t a i n e d earnings.. 9 R e t a i n i n g e a r n i n g s i s s o m e t i m e s p r e f e r r e d , to p a y i n g d i v i d e n d s and- h a y i n g to r e s o r t t o s e l l i n g s h a r e s and d i l u t i n g c o n t r o l , or' i n c r e a s i n g l e v e r a g e a n d t h u s r i s k to t h e s h a r e h o l d e r s . . I n t e r n a l f i n a n c i n g a v o i d s d i v e r s i o n of t i m e , e n e r g y , a n d o u t - o f - p o c k e t e x p e n s e s i n v o l v e d i n f l o a t i n g a new i s s u e .  • (6) t h e c o n f i d e n c e m a n a g e m e n t cial  data r e l e a s e d by the a c c o u n t i n g  Lintner which  Thompson  and  More  rectors  had i n the f i n a n department.  then i n c o r p o r a t e d these f i n d i n g s into a m o d e l  he t e s t e d a n d u s e d  surveyed  85  for prediction.  Walsh  recently,  Thompson  195 m a n u f a c t u r i n g ranked  a n d W a Is h...( 1 9 63 )  f i r m s to f i n d  o u t how d i -  c e r t a i n f e a t u r e s of a s o u n d  cash  divi-  de n d p o l i c y . ••  •  " TABLE  VII  '  HOW 195 A M E R I C A N ' C O M P A N I E S RANKE D THE R E L A T I V E I M P O R T A N C E OF CONTINUITY, R A T E S T A B I L I T Y , AND S I Z E OF DIVIDEND  Feature First  Rank Second  Total  companies  Third  137  48,  10  195  Stability  50  13 2 '  13  195  Size  11  .12  17/2  195  C ontinuity  ! :  S o u r c e : G. C. T h o m p s o n a n d F . I . W a l s h , J r . , "Companies Stress Dividend Consistency," Management R e c o r d , v o l . X X V ( J a n u a r y 1 9 6 3 )., p. 3 0 . -  Their  conclusions  were s i m i l a r  to' L i n t n e r ' s, t h a t i s ,  "... d i v i d e n d p r a c t i c e s ... c a n b e s t  be c h a r a c t e r i z e d  10 as  conservative  giving  and c o n s i s t e n t . "  top p r i o r i t y  cited f o r  to d i v i d e n d c o n t i n u i t y i n c l u d e d (1)  a f e e l i n g of r e s p o n s i b i l i t y desire  Reasons  steady-income,  towards s h a r e h o l d e r s  (2) a d e s i r e to b u i l d  the com-  pany's image and r e p u t a t i o n i n the f i n a n c i a l (3) m a n a g e m e n t p r i d e , a n d ( 4 ) t h e s t a g e  who  community,  of t h e c o m p a n y ' s  growth cycle. The prime funds ;  survey  showed t h a t t h e f o l l o w i n g f a c t o r s a r e  i n f l u e n c e r s of d i v i d e n d p r a c t i c e s : (1) c a s h  1 1  a v a i l a b l e and a n t i c i p a t e d need f o r  (2) c o m p a n y ' s p a s t (3) i n t e r e s t s  and p r o s p e c t i v e  earnings;  of s h a r e h o l d e r s ; 12  (4) i m o a c t o f t a x e s . 10 T h o m p s o n , a n d W a l s h , o_p_. c i t . , p. 3 0. -'-•'-Gash m a y - b e u s e d f o r e x p a n d i n g i n v e n t o r i e s , a c q u i r i n g f i x e d a s s e t s , r e d u c i n g debt o r e x p a n d i n g on r e s e a r c h s o t h a t h i g h e r p r o f i t s do n o t n e c e s s a r i l y m e a n h i g h c a s h b a l a n c e s o u t of w h i c h d i v i d e n d s w i l l be p a i d . L i b e r a l c a p i t a l c o s t a l l o w a n c e s , a l l o w i n g c o m p a n i e s to d e f e r p a y i n g i n c o m e t a x e s , i f u t i l i z e d , m e a n g r e a t e r cash, f l o w s . . 1^In t h e C a n a d i a n s i t u a t i o n t h i s w o u l d a p p l y to c a p i t a l gains which a r e not taxed v e r s u s d i v i d e n d s w h i c h a r e t a x e d at. t h e m a r g i n a l p e r s o n a l t a x r a t e s l e s s t h e 20 p e r c e n t c r e d i t .  87 The.authors  a l s o found that c e r t a i n  t h u m b " w e r e u s e d by b e c a u s e i t i s a "... "...  reasonable  o n e - t h i r d to t h e  the b u s i n e s s  and  O n l y 35 a stock  per  balance  cent  shares  share  retirement."  dividends  was  maintained,  to s t o c k  declared  last five years.  would mean a greater  Others objected  and  of t h e c o m p a n i e s h a d  The  main  the p e r m a n e n t  liabi-  of f u t u r e d i v i d e n d p a y m e n t s . r a t e was  ..."  cent  owners, one-third retained in 13  d i v i d e n d w i t h i n the  dividend  " r u l e s of  s u c h a s : 50 p e r  o n e - t h i r d f o r debt  o b j e c t i o n to s t o c k lity  executives  crude  T h a t i s , i f the  a greater number strain  dividends  (1) e x p e n s i v e  and  time  (2) w o r t h l e s s  (Their value  on  future  old of  earnings.  b e c a u s e they  are:  consuming; i s o f f s e t by  reduced  p r i c e .); (3) s u b s t i t u t e s f o r c a s h  plained  a b o u t l a c k of  Questionnaire The according  (Shareholders  cash.).  to C a n a d i a n  Companie's  questionnaire. Questionnaires to t h e  Walsh were sent,  results on  com-  of L i n t n e r , a n d  designed Thompson  and  a c o n f i d e n t i a l b a s i s , to d i r e c t o r s  of Canadian f i r m s . T h r o u g h  T h o m p s o n and  the u s e  Waisn,  op.  of r a n d o m  c i t . , p.  32.  numbers,  •  thirty  c o m p a n i e s , each' w i t h t o t a l a s s e t s  million  dollars,  Post.Survey  were selected from  88  .  over ten  The F i n a n c i a l  of: I n d u s t r i a l s 1 9 6 6 . F i f t e e n f i r m s i n  t h e f o r e s t p r o du c t s • i n du s t r y a n d t e n i n t h e f o o d i n dustry in  were s i m i l a r l y  these  selected. Since  two i n d u s t r i e s o v e r l a p p e d  all-industries sample, sent,  i n m.ost c a s e s ,  directors.  only fifty  some  firms  with those  questionnaires  considered  o r i f he r e s i d e d i n a n o t h e r c o u n t r y , -  a  figurehead  e i t h e r the p r e s i -  dent o r v i c e - p r e s i d e n t i n c h a r g e of f i n a n c e the r e q u e s t . f o r  a m e m b e r of the b o a r d . r e s p o n d e d ; one o t h e r  were  to--the • c h a i r - m e n - o f .the b o a r d s of  I f a- c h a i r m a n ' w a s  In e a c h c a s e ,  i n the  i n f o r m a l i o n was  T h i r t y - t h r e e company  replied  of t h e o r i g i n a l ' l e t t e r ; ,  was  polled.  s e n t to officials  with only a l e t t e r .  questionnaire,  and t r a c e r  Copies letter  a p p e a r -in . A p p e n d i x F .-. ' . R e s p o n s e , to q u e s t i o n directors fluence  were asked  example,- t h i s y e a r ' s present in  to r a t e . f a c t o r s h a v i n g  on the d i v i d e n d  a n d X ) . . M a n y of. t h e s e  one . In the f i r s t  d e c i s i o n .(see  VIII, IX,  p r o f i t i s i n v e r s e l y r e l a t e d to  and s a l e s may  ment p r o j e c t s .  an i n -  factors are interrelated.. For  andanticipated. need f o r cash;  earnings  Tables  question,  expected • growth  be r e l a t e d to p l a n n e d i n v e s t -  89  i n the with  S i z e has  b e e n s h o w n to be  dividend  d e c i s i o n ( A p p e n d i x D)  over  cluded of t h e  ten m i l l i o n  i n the other  list,  however, because  m e a n i n g of i n t e r n a l r i s k .  fer  to i n t e r n a l o p e r a t i n g  the  forest  i n d u s t r y , or  r e s p o n s e s to t h e f i r s t directors rated  dividend the  This  risks  to  fire  was  not  and  risk,  finance.  the  to  re-  c h a n c e of  spoilage  s e a s o n and  X  i n the  winter  a  case  snow  in  profit  These  show  factors involved  clearly  other  tables  of  in  dominated.  the  From  factors considered  anticipated need for  (2) p l a n n e d i n v e s t m e n t  very  cash;  projects;  dividends;  (4) e x p e c t e d  growth in earnings  variability  in earnings  or  and  sales.  sales, future  n a n c i n g . p l a n s , c a p i t a l s t r u c t u r e , r a t e of r e t u r n and  how  were:  (1) p r e s e n t a n d  (3) p a s t  present a summary  question.  sample  important in order  capital,  in-  many  supposed  s u c h as  the v a r i o u s  d e c i s i o n . Net  all-industries  Expected  It was  industry.  Tables VIII, IX,  the  firms  d e g r e e of  ability  plant breakdown, inventory food  even f o r  e x p r e s s e d - in s e v e r a l r e p l i e s about  the  of t h e  variable  i-t r e f l e c t s  profits,  a n t i c i p a t e d n e e d f o r c a s h , and  strike,  important  dollars in assets.  f a c t o r s s u c h as  D o u b t was  an  cost  q u e n c y of d i v i d e n d  of c a p i t a l w e r e r a t e d  important.  c h a n g e s , a t t i t u d e s of  fion Fre-  shareholders,  90 e f f e c t on p r i c e , u s e of s t o c k and  splits  and' d i v i d e n d s ,  i n t e r n a l r i s k s w e r e of s o m e i m p o r t a n c e .  t i t o r s ' payout ratio  a n d the e x i s t e n c e , of c o n t r o l  were not considered' occasional existed  groups  to h a v e a n y w e i g h t e x c e p t b y t h e  director. Since  i n only  Compe-  strong  control  groups  a s m a l l . n u m b e r of t h e c o m p a n i e s ,  this  l a i t t e r r e s p o n s e - 'was' e x p e c t e d . The sample  ratings  of v a r i a b l e s i n the a l l - i n d u s t r i e s  and i n the forest, p r o d u c t s i n d u s t r y  w e r e b a s i c a l l y s i m i l a r .. H o w e v e r , s o m e  sample  differences  w e r e a p p a r e n t -and a l t h o u g h the.se a r e n o t s t a t i s t i c a l l y s i g n i f i c a n t b e c a u s e of t h e s m a l l  sample  s i z e s the r e -  s u l t s a r e i n d i c a t i v e .. I n t h e f o r e s t p r o d u c t s sample, past dividends  were  rated  industry  along with  y e a r ' s p r o f i t as one of t h e two m o s t i m p o r t a n t ables.  This  outcome i s entirely. compatible  findings f o r large industry  industrial  favourable  vidends  dividend  record;  s h o u l d be i m p o r t a n t  i m p a c t of t h e i r i n f o r m a t i o n a l shareholders',  are large  as e x p e c t e d ,  vari-  to L i n t n e r ' s The forest  i s w e 11, e s t a b l i s he d. a n d t h e f o r e m o s t  i n C a n a d a ; m o s t of t h e f i r m s and  corporations.  this  industry  w i t h .a s t e a d y  consequently past d i -  e s p e c i a l l y b e c a u s e of t h e contents.  Attitudes of  were also  considerably  m o r e p r o m i n e n t than t h o s e i n d i c a t e d by the a l l - i n d u s tries  sample. . Future financing plans, i n t e r n a l . r i s k s ,  9.1 c a p i t a l s t r u c t u r e , and considered  rate  relatively  of r e t u r n  on  l e s s i m p o r t a n t b e c a u s e of  forestry  f i r m s ' s i z e , . a c c e p t a n c e , and  industry  cycle.  Results similar  food industry  to t h o s e of t h e  f a c t i s not food  of t h e  are  cyclic,  and  sample were  all-industries sample.  l e s s unique than f i r m s  industry; many food f i r m s have m a r k e t s  growth i n C a n a d a .  are  relatively  l i m i t e d by .  /  .  the  position in  surprising; in Canada, firms  industry  c a p i t a l were  the  the  very This  within  the  i n the  forest  small,  non-  population ..' "''  TABLE  VIII  • I M P O R T A N C E OF F A C T O R S IN T H E D I V I D E N D D E C I S I O N F O R A R A N D O M L Y S E L E C T E D G R O U P O F 20 C A N A D I A N : C O M P A N I E S , . E A C H WITH- T O T A L A S S E T S O V E R 10 M I L L I O N D O L L A R S (  Factor  D egree of importance I very some not important importance • important . ' sub sub 2 1 total 3 4 total 5  past dividends  3 10  this year's profit  •9  8  frequency of dividend-• " changes  1  expected growth in. earnings and sales  3  expected variability in earnings o r sales  Total rep lie  13 ' 3 ' 3  6  19  . 17  2  1  3  20  3  4  7  6  13'  9  12  5  2  7  2  19 19  •  •  •  .  . 4 7 - 11  '5  4  9 .  1  1  1  6  7  12  20  14.  1  20  4  20  competitors' payout -ratio  20  attitudes of shareholders  2  3-  5 10  4  effect of a dividend change on market price of stock  1 .1.  '2 : 4  TO  14  future financing plans i . equity i i . debt  5 5  6 5  7' 2 7.: :3  9 10  20 20  planned investment projects  4  9 ,- 13  2- • -5  7  20  capital structure  3  4  7  4  4  8  rate of return on capital  3  5  .8  4  6  10 '  present and anticipated need for cash •  9  5  14  1  5  6  internal r i s k s  1  3  '4  5  4  9  use of stock s p l i t s , dividends, and extras  1  2  •3  4  6  10  4  2  6  1  1  relative size of stock ownership by management or other control groups cost of capital  .1  .11 10  2 .:  2  1  2  - 4 .2..  19 20 '20  5'  18  • 4  17  12  20 3  if-  TABLE  IX  \  I M P O R T A N C E OF F A C T O R S IN T F E D I V I D E N D D E C I S I O N F O R 10 C A N A D I A N COMPANIES IN T H E F O R E S T P R O D U C T S I N D U S T R Y  . Factor .  . Degree of importance very some noT • important importance important sub sub 1 2 - total -3 4 total 5 !  ' Total replies  past dividends  2  6  8  2  '2  10  this year's profit  6  1  7  3  3  . 10  frequency of dividend changes  1  1  2  4  1  •5  3  10  . 4'• 2  6  1  2  3  ' : l  10  3  6  2  1  3  competitors' payout ratio  .1'  1  1  ' 1- - •2  attitudes of shareholders,.  4.  4  4  -.2  effect of a diwidcndichango on market price' of stock  1  i. '  ,4  expected growth i n .* • earnings and sales  :  expected variability' in earnings or sales  3  future financing plans i . . equity i i . . debt  1 "3 4  planned investment projects •  1  4  capital struc ture  1  1 ' 2  rate of return on capital present and anticipated ' need for cash internal r i s k s  • 1 _2' 2  4 4  cost of capital  10 9  6' ,  10  8  7".  10  1 5 ' • 2 • 5  l l .  10 10  5 . 1.  3  4  %  3  5" .  3 ' '• 1  4  5  V  •  " 3 2  . 10 ' 10 10  5  7  2  1  3  1-  1  2  1.  3  4  8  2  3  5  4  9  • 1  1  2  .7 .  use of stock s p l i t s , dividends, and extras relative size of stock ownership by management or .other control groups  ;  '43  4  l  1 • 1  2  2  10  10 2  TABLE  r  X  I M P O R T A N C E OF F A C T O R S IN T H E D I V I D E N D D E C I S I O N FOR,8 C A N A D I A N C O M P A N I E S IN T H E F O O T I N D U S T R Y D egree of importance very some ' not ' important importance important sub' sub 1 2 total 3 4 total 5  Factor past dividends • '  '  this year's profit frequency of dividend changes expected growth in. earnings and sales;  2  2  4  4  4  8  3  3  1  2  2  7  4  6••  1  1  1  8  . 2  expected v a r i a b i l i t y in earnings or sales  3  1 4  competitors' payout ratio attitudes of shareholders effect of a dividend change on market price of stock future financing plans i . equity i i . debt  2 1 1  3 3  2'  '  8  2  1  3  1  1  3  4  4  5  1  6  •8  2 2  1 2  3 4  8 8  2  2  8  2  4  1  7  3  6  1  8  5 1 4  projects  6  6  capital structure  2  2  rate of return on capital  1  1  planned investment  present and anticipated '  internal r i s k s use of stock s p l i t s , dividends and extras relative size of stock ownership by management or other control groups cost of capital  4  3  7  3  3  1  1  2  2  3 1  - 2 2  2  8  1  2  need for cash  Total replies  2  9.5  Response  to q u e s t i o n t w o . T a b l e X I s h o w s a  s u m m a r y of r e s p o n s e s to the q u e s t i o n : Do. y o u h a v e a t a r g e t p a y o u t r a t i o to a i m  for?  TABLE XI  .  N U M B E R OF' FIRMS WITH AND WITHOUT A TARGET PAYOUT RATIO  Sample . size  Indus t r y  All  industries'  Forest Food  industry  With target payout ratio  Percentage with target.  Without target payout ratio  20  12  8  60  10  5  5  50  5  3  62  industry  T h e c h o o s i n g of a t a r g e t had no a p p a r e n t t i o n s h i p with f i r m o r any o t h e r cate,  s i z e , p r o f i t a b i l i t y - , - c a p i t a l . s true tur e ,  m e a s u r e a b l e - v a r i a b l e . T h e r e s u l t s - do  however,  consider,  rela-  indi-  t h a t o v e r o n e - h a l f of C a n a d i a n . f i r m s  to s o m e d e g r e e ' ,  i s the a c t i v e p o l i c y  t h a t the d i v i d e n d - d e c i s i o n  variable.  E x a m i n a t i o n of the y e a r l y p a y o u t d a t a of t h o s e firms  d e c l a r i n g a; t a r g e t r a t i o i n d i c a t e d thait t h e y d i d ,  in f a c t ,  have a f a i r l y  c l e a r l y defined target.  That  some  of t h e s e f i r m s d i d not h a v e an a p p a r e n t g o a l m a y be  96 ' a t t r i b u t e d - to a . s l o w a d j u s t m e n t to t h e g o a l  (conserva-  t i s m ) when confronted  .Examina-  with  rising  t i o n of t h e r e m a i n i n g f i r m s indicated  earnings.  u s u a l l y , but not a l w a y s ,  a changing or f l u c t u a t i n g payout  Response  to q u e s t i o n  ratio.  t h r e e s . T a b l e X I I shows  how d i r e c t o r s o f C a n a d i a n ~, c o m p a n i e s r a n k e d features  of a s o u n d  cash dividend  pondents  expressed  confusion  policy. Several  i n the' d i f f e r e n c e  c o n t i n u i t y • a-nd • s t a b i l i t y , a n d i n d e e d , been i n t e r p r e t e d Clearly, tinuous also  differently  distinct policies.  For example,  the  rate  to i n c l u d e  in the upward  o r do'they c o n s i d e r  the p o s s i b i l i t y  plan  a stable rate  rate of'  was  of a s t e a d y  inter-  movement  d i r e c t i o n was.assumed. An unstable  t h o s e who  ranked  stability  frequency  of c h a n g e s i m p o r t a n t ,  dividends  may  and  clearly  but not n e c e s s a r i l y  would then mean f l u c t u a t i n g dividend rally,  are  do t h e d i r e c t o r s  utmost importance? That a stable  preted  be c o n s i d e r e d  payments.  first  also  and vice v e r s a .  of a . s t a b l e  A l t h o u g h some m i x u p was a p p a r e n t , of d i r e c t o r s , p o l l e d i n e a c h o f this' t h r e e  rate  Gene-  considered  a non-repetitive  would not change the s t a t u r e  have  discon-  dividends  represent  to p a y c o n s i s t e n t l y e v e r y q u a r t e r at a s t a b l e  between  directors.  exclusive;  a r e not stable; stable  c o n t i n u o u s ; but the two may  res-  these two may  by the v a r i o u s  the two a r e not m u t u a l l y dividends  certain  .Extra  bonus rate.  the m a j o r i t y  samples  agreed  97  on the o r d e r bility,  of the t h r e e v a r i a b l e s : c o n t i n u i t y ,  and s i z e .  These  previously mentioned Indeed,  the  isalmost  results  sta-  c o n f i r m t h o s e of  the  s t u d y by T h o m p s o n and W a l s h . .  summary.of  r e p l i e s by C a n a d i a n  i d e n t i c a l to the r e s u l t s  directors  i n T a b l e V I I , page  8b .  •"• - "  T A B L E XII  C A N A D I A N D I R E C T O R S ' RANKING' OF C O N T I N U I T Y , AND- S T A B I L I T Y  ; Feature.  Sample All industries  .  R a n k "• First  Continuity  1.3.  Stability  .6 • .  Size • Forest industry  Size  .  •C o n t i n u i t y  •  20  12  2  20  3  16  20  9 • ' , .1  0  10  9  1  10  1 "  0  9 .  10  .  1  0  '  .  ' Third 2  •o.  Stability  Total companies  •  5  •1  C ontinuity  Food industry  Second  SIZE,  7  8  Stability  1  5  2 '  [  8  Size  0  2  6  :•  • 8  98 Response  to q u e s t i o n f o u r .  T a b l e XIII shows a  s u m m a r y of r e s p o n s e s to the q u e s t i o n : Do y o u c o n s i d e r t h a t the p r i m a r y d i v i d e n d d e c i s i o n i s : Do we n e e d to c h a n g e  the a m o u n t  of the d i v i d e n d we a r e  pre  s e n t l y p a y i n g ? A b o u t 40 p e r c e n t of t h o s e r e p l y i n g answered  yes.  c i s i o n i s made  The p r e m i s e . i s  t h a t the d i v i d e n d d e -  i n the f r a m e w o r k ; of n e v e r  raising a  d i v i d e n d i f at s o m e p o i n t of t i m e i n the f u t u r e dividend payment  would have'to TABLE  the  be'decreased .  XIII  D I R E C T O R S ' OPINION ON W H E T H E R T H E N E E D T O C H A N G E T H E D I V I D E N D A M O U N T .IS THE PRIMARY DECISION' *  Industries  Sample size;;  Affirmative  Negative  Percentage affirmative  All industries  19  8  .1 1  .42'  Forest industry  10  4  , 6 .  40  .5  29  Food industry  Th.e a n s w e r somewhat larger tive .  related  companies  7  2 •  to q u e s t i o n f o u r was f o u n d to be to the s i z e of the c o m p a n y , t e n d i n g to r e s p o n d i n the  the  affirma-  99 The r e s u l t s those'of  are  d e f i n i t e l y not c o m p a t i b l e  with  L i n t n e r who c o n c l u d e d t h a t the q u e s t i o n  under  • c o n s i d e r a t i o n was the m a j o r p o l i c y d e c i s i o n i n t w e n t y six  of the t w e n t y - e i g h t f i r m s he i n v e s t i g a t e d and p r o -  c e e d e d to b a s e the s p e e d of a d j u s t m e n t 14 d i v i d e n d , m o d e l on t h i s c o n c l u s i o n . nada,  past dividends are  c o n c e p t and h i s Because,  l e s s i m p o r t a n t and  i n C a n a d a , m.any f i r m s do not h a v e a t a r g e t ratio, i j  i  the L i n t n e r d i v i d e n d m o d e l i s not  .  • •  •  in C a -  because, payout  appropriate  •  to' the C a n a d i a n s i t u a t i o n . .  T h i s c o n c l u s i o n d o e s not n e g a t e the  of t h i s ' m a j o r p o l i c y c o m p o n e n t  importance  ( p a s t d i v i d e n d s ) of the  . d i v i d e n d d e c i s i o n to m a n y C a n a d i a n f i r m s . . F o r i n i  stjance,  the c h a i r m a n of a l a r g e p u l p and p a p e r  com-  pany  stated: No b o a r d of d i r e c t o r s of a p u b l i c c o m p a n y c a n tak'e p r i d e i n b e i n g r e s p o n s i b l e f o r a d i v i d e n d r e d u c t i o n so t h a t , - i n r e v e r s e , a d i v i d e n d i n c r e a s e i s not l i k e l y ' u n l e s s the p r o s p e c t s a r e f a v o u r a b l e f o r c o n t i n u a t i o n i n the y e a r s to c o m e . ! " 3  A d d i t i o n a l comments'.  The' d i r e c t o r s w e r e  a s k e d fo'r a n y a d d i t i o n a l c o m m e n t s vidend p o l i c y . I  4  Responses  or attitudes  also on d i -  to t h i s q u e s t i o n h e l p e d  L i n t n e r , " D i s t r i b u t i o n of, Inc o me s , " p .  107,  ^ T h e p r e c i s e s o u r c e s of t h e s e c o m m e n t s a r e not s t a t e d b e c a u s e of the c o n f i d e n t i a l n a t u r e of the replies..  100 e l u c i d a t e the n a t u r e of the d i v i d e n d d e c i s i o n i n . C a n a d a . In s e v e r a l i n s t a n c e s  these views were more  per-  t i n e n t t h a n the r e t u r n e d q u e s t i o n n a i r e . F o r e x a m p l e , a trust  company president  but no c o m p l e t e d f o r m  who a n s w e r e d w i t h a l e t t e r  d i d so to c l a r i f y any  miscon-  c e p t i o n s a b o u t the d i s t i n g u i s h i n g c h a r a c t e r i s t i c s of t h e . d i v i d e n d d e c i s i o n i n t h a t i n d u s t r y .'• He r e m a r k e d : T h e f o r m i s not p a r t i c u l a r l y p e r t i n e n t to o u r C o m p a n y a n d t h e r e f o r e I c h o o s e to d r o p y o u t h i s note.  O u r I n d u s t r y has a v e r y s p e c i a l r e a s o n f o r i n d u l g i n g , i n a r e t a i n e d e a r n i n g s • p r a c t i c e . U n d e r the T r u s t C o m p a n i e s A c t , C a n a d a , we m a y a c c e p t on d e p o s i t ' o n l y 15 t i m e s o u r P a i d up ' C a p i t a l ' a n d S u r p l u s . , I f o u r g r o w t h i s to be, m a i n t a i n e d at the r a t e c o n s i s t e n t w i t h the l a s t n u m b e r of y e a r s , then o u r c a p i t a l b a s e w i l l a l w a y s be u n d e r p r e s s u r e f o r i n c r e a s e and t h i s m a y be a c c o m p l i s h e d o n l y by r e t a i n e d e a r n i n g s o r by a d d i t i o n a l s u b s c r i p t i o n i n the e x e r c i s e of r i g h t s t o . s h a r e h o l d e r s . • W h i l e the i s s u a n c e of r i g h t s to s h a r e h o l d e r s i s n o r m a l l y w e l c o m e d by t h e m , y o u w i l l r e c o g n i z e i t I s d i f f i c u l t f o r a c o m p a n y to s h o w a good r e c o r d of i n c r e a s e i n e a r n i n g s p e r s h a r e w h e n the n u m b e r 'of. s h a r e s outstanding is.'being i n c r e a s e d , more or l e s s r e g u l a r l y . . H e n c e r e t a i n e d e a r n i n g s , hence d i s t r i b u t i o n of a p p r o x i m a t e l y 6 0% o f ' n e t e a r n i n g s . , ' The  official  of .a t e x t i l e f i r m  had t h i s to s a y :  T h e s e q u e s t i o n s In, r e g a r d to t h i s c o m p a n y . a r e u n f o r t u n a t e l y a c a d e m i c s i n c e a r e [our] p r o f i t s f o r the p a s t few y e a r s a r e b e i n g u s e d to r e d u c e a r r e a r s on c l a s s A s h a r e s . C o m m o n d i v f d e n d s c a n n o t be p a i d u n t i l A is c l e a r e d .  101. One of the m a j o r  c o n c l u s i o n s a r i s i n g f r o m both  the n o n s p e c i f i c c o m m e n t s answers dustry  i s the e x i s t e n c e difference  and o b s e r v a t i o n of the of a c o n s i d e r a b l e  i n the a t t i t u d e  towards  other'  inter-in-  the  various  d e t e r m i n a n t s , of the d e c i s i o n . T h i s f a c t was b e s t - e x pressed  by the c h a i r m a n and p r e s i d e n t  of a l a r g e C a -  n a d i a n c o m p . a n y y a n d a d i r e c t o r of n u m e r o u s  others.  -It i s m y e x p e r i e n c e i n the v a r i o u s C a n a d i a n c o m p a n i e s on w h i c h ' I 'am a d i r e c t o r t h a t t h e r e i s f a r m o r e c o r r e l a t i o n i n d i v i d e n d p a y o u t , w i t h i n an i n d u s t r y i n C a n a d a t h a n i n any - e m p i r i c a l s t r u c t u r e . Consequently, major  any d i v i d e n d m o d e l s e t up to e x p l a i n the  determinants  of d i v i d e n d b e h a v i o u r s h o u l d be  a p p l i e d 'on., an i n d u s t r y b a s i s to t a k e a c c o u n t of d i f f e r e n t  or. s h o u l d be industry  formulated  characteristics  that h a v e a b e a r i n g on the d i v i d e n d d e c i s i o n ' , s u c h expected future  g r o w t h a-nd  needforcash.  A l t h o u g h the q u e s t i o n n a i r e directors  s e v e r a l respondents commented  ranked.  results  indicate  c o n s i d e r a host of v a r i a b l e s i n t h e i r  were seldom s p e c i f i c a l l y For example,  i n the b e v e r a g e  t h a t these  mentioned,  that  decision,  variables  formulated,  the c o n t r o l l e r of a l a r g e  industry  as,  or firm  stated:  I am c e r t a i n that y o u w i l l a p p r e c i a t e the, f a c t t h a t e a c h of the p o i n t s c o v e r e d i n the q u e s t i o n n a i r e h a v e not s p e c i f i c a 1 l y , b e en d i s c u s s e d i n tne c o n t e x t that.you phrase y o u r - q u e s t i o n n a i r e . However, obv i o u s l y , a l l of y o u r p o i n t s h a v e b e e n c o n s i d e r e d by o u r m a n a g e m e n t at v a r i o u s t i m e s .  102 One c h a i r m a n , panies,  a l s o a d i r e c t o r of m a n y c o m -  had i n f o r m a t i v e o p i n i o n s on the e f f e c t of  control groups.  He s u b d i v i d e d t h e s e g r o u p s  n a g e m e n t and n o n - m a n a g e m e n t latter  into m a -  and c l a i m e d t h a t . t h e  was a m o r e p o w e r f u l f a c t o r . . He had the. f o l -  l o w i n g to s a y a b o u t  the  former.'  I b e l i e v e t h a t the e f f e c t of i n t e r n a l m a n a g e m e n t o w n e r s h i p of s t o c k s h o u l d be n e g a t e d i n c o n s i d e r i n g d i v i d e n d a c t i o n . ..This i s an a r g u m e n t of s o m e v a l i d i t y against stock options where i n t e r n a l man a g e m e n t i n r e c o m m e n d i n g d i v i d e n d p o l i c y to a B . o a r d m a y be s e r v i n g two' m a s t e r s . Another s i g n i f i c a n t outcome m e n t s of n u m e r o u s  firms recognize  i m p a c t - of d i v i d e n d s . . F o r e x a m p l e , large integrated  forest.products  is that the  manage-  informational  the p r e s i d e n t  firm  declared  of a  that  one of ..... the two p r i m e c r i t e r i a use-d i n c o n s i d e r i n g . d i v i d e n d p o l i c y of o u r c o m p a n y a r e . . . the n e e d to d e m o n s t r a t e e a r n i n g pow.er and t o t a l p a y i n g c a p a city. . t.  . A l t h o u g h the c o s t of c a p i t a l i s an  important  t h e o r e t i c a l c o n c e p t i n d e r i v i n g the o p t i m u m d i v i d e n d payment,.not  one r e p l y i n d i c a t e d t h a t the c o s t of c a -  pital entered  d i r e c t l y i n t o the d e c i s i o n . T h e  r e s p o n d e n t s who' r a t e d relatively important, pondents  c o s t of c a p i t a l c o n s i d e r e d  it  but none of the t w e n t y - f i v e  res-  who .were not a s k e d to r a t e i t m e n t i o n e d  although-numerous listed.  seven  a d d i t i o n a l v a r i a b l e s were  The l o g i c a l i n f e r e n c e  it,  often  to be d e r i v e d f r o m  this  ;  103  f a c t and a d d i t i o n a l c o m m e n t s  i s that d i r e c t o r s  con-  s i d e r e d c o s t of c a p i t a l i n a c o n t e x t d i f f e r e n t f r o m suggested  by t h e o r y .  Similarly,  directors rated  financing plans presumably because dends would l i k e l y r e s t r i c t a.ccess t o ,  and a f f e c t ' t h e  that  future  a change i n d i v i -  or e n h a n c e  their  c o s t of f u n d s .  company's  B u t the  theory  s t a t e s t h a t w i t h a g i v e n c o s t of c a p i t a l , the l o w e r i t i s i n r e l a t i o n to p r o f i t a b i l i t y ,  the g r e a t e r  s h o u l d be  r e t e n t i o n to m a x i m i z e f.ir.-m v a l u e - . T h e s e c r e t a r y treasurer  of a l a r g e c h e m i c a l f i r m  and  c a m e the' c l o s e s t  to r e l a t i n g p r a c t i c e and t h e o r y .  . •  T h e o b j e c t i v e i s to. m a x i m i z e " r e t u r n to s h a r e h o l d e r " by a t t a i n i n g g r o w t h f i n a n c e d by r e t a i n e d e a r n i n g s , debt and e q u i t y i n the p r o p e r r a t i o s . Thus,  s t i l l another  conclusion a r i s i n g from  the  t i o n n a i r e i s that m o s t ' ' d i v i d e n d d e c i s i o n m a k e r s ignore or are  i g n o r a n t of s u g g e s t i o n s  queseither  by a c a d e m i c s .  S o m e of the d i r e c to r s *dis p l a y e d s t r o n g  opinion  ;  on the . r e l a t i o n s h i p of the d i v i d e n d d e c i s i o n to the i n vestment  and o t h e r f i n a n c i a l  d e c i s i o n s . The  remarks  o|f the e x e c u t i v e v i c e - p r e s i d e n t of a l a r g e c a n d y c o m .pjany a r e  c l e a r l y . one - s i de d i n t h i s r e g a r d ,  p o r t r a y and e x e m p l i f y an a w a r e n e s s  but  among  management  of the i m p o r t a n c e of i n c o r p o r a t i n g m a n y f a c t o r s s h o r t and l o n g r a n g e  p l a n s and w i t h c o m p a n y  they  with  objectives  i n the d e c i s i o n - m a k i n g t a s k . E a c h que.stion r a i s e d i n y o u r f o r m is i m p o r t a n t . .1 do not c o n s i d e r t h a t t h e r e i s one p r i m a r y d e c i s i o n  104 to be m a d e . - I n a c t u a l f a c t , d i v i d e n d p o l i c y i s e s t a b l i s h e d by t a k i n g i n t o c o n s i d e r a t i o n e v e r y f a c t o r a f f e c t i n g the c o m p a n y ' s a c t u a l p e r f o r .manc'e v i s - a - v i s s h o r t r a n g e and l o n g r a n g e p l a n n i n g . . O u r j o b i s to p r o v i d e the s h a r e h o l d e r w i t h the b e s t p o s s i b l e p e r f o r m a n c e t h a t w e , as t h e i r - M a n a g e m e n t , are- c a p a b l e of p r o v i d i n g . Perhaps  the c h a i r m a n - a n d p r e s i d e n t  of a l a r g e  s t e e l c o r p o r a t i o n m a d e the m o s t a p p r o p r i a t e  comment  about- the q u e s t i o n n a i r e " and the d i v i d e n d ' d e c i s i o n i n Canada, G e n e r a l l y , the p e r m u t a t i o n s -and c o m b i n a t i o n s of the f a c t o r s y o u ' e n u m e r a t e w i t h ' r e s p e c t to d i v i d e n d p o l i c y a r e so- m a n y t h a t i t i s m o s t d i f f i c u l t to e v a l u a t e t h e m e x c e p t i n the l i g h t of c u r r e n t c o m - p a n y and e c o n o m i c c o n d i t i o n s . -I s u p p o s e i n a n o t h e r s e v e r a l years I might answer your questions diff e r e n t l y . T h i s - w o u l d not n e c e s s a r i l y i n d i c a t e a s u b j e c t i v e a t t i t u d e ; it is just that c h a n g i n g . c o n d i tions would influence e v a l u a t i o n . I I I . . T H E L I N T N E R 'DIVI-D EN-D • M O D E L D e v e l o p m e n t and R e s u l t s Lintner embodied his major findings 15 • • po r a t e d i v i d e n d - m o d e l , . (12) A D a +c .(D* -.D l) t it Whe r e i i n d i c a t e s the p a r t i c u l a r c o m p a n y U  =  i  i  t. i n d i c a t e s • t h e y e a r AD-|.-a,-=  i t  i ( t  )  into a c o r -  u  under c o n s i d e r a t i o n  change, i n d i v i d e n d  payments  constant  Lintner , "Distribution of Incomes,"  p . 107 .  105 c^= s p e e d of a d j u s t m e n t  factor  D * = p r e s e n t d i v i d e n d i f the d i v i d e n d has b e e n b a s e d on the t a r g e t p a y o u t r a t i o , r , a p p l i e d to c u r r e n t y e a r ' s p r o f i t a f t e r t a x e s , P . . thus , D * - r P i t  ;  it  1 1  it  D ^ j . _ -jj = d i v i d e n d s p a i d i n t - 1 u^-  d i s c r e p a n c y between o b s e r v e d dividend c h a n g e and t h a t e x p e c t e d on the b a s i s of the o t h e r t e r m s  T h e m o d e l e x p l a i n e d d i v i d e n d p o l i c y i n 85 p e r c e n t of the c o m p a n y y e a r s years,  (twenty-eight  companies  1947 to 1953) w i t h m o d e r a t e  discrepancies.  a +  l t =  Whe r e :  bP +  u  u  dD.  ( t  _  The  1«  m o d e l was c o n v e r t e d to an i d e n t i t y : (13) D  in seven  1  )  +  u.  t  b = cr d' = 1 - c '  T h i s m o d e l was f i t t e d to d a t a f o r the y e a r s to 1951 and to d a t a f o r v a r i o u s s u b p e r i o d s years  and p r o d u c e d  dom r e s i d u a l s ,  "...  major  highly significant regression  subgroups  f o r the y e a r s because x u  within these  excellent correlations,  c i e n t s o v e r the e n t i r e p e r i o d , of the y e a r s . "  1918  ran-  coeffi-  1 9 1 8 - 1 9 5 1 , and a l l 17 W h e n f i t t e d to  1918 to 1 9 4 1 , e x c l u d i n g 193 6 and  data  1937  of a tax i n d u c i n g the d e c l a r a t i o n of d i v i d e n d s , Ibid.,  17 ' Ibid.  p.  109.  106 t-he r e s u l t i n g e q u a t i o n s w e r e : . 70D^_ and D  1  ^. w i t h p r o f i t s a d j u s t e d 106.0 1  :  .145 P +  -when p r o f i t s  t  When the f o r m e r was u s e d to f o r e -  c a s t p o s t w a r b e h a v i o u r , the e s t i m a t e cent under a c t u a l a v e r a g e  f o r the e q u a t i o n not a d j u s t e d  i  was 2 . 0  per  d i v i d e n d s , a n d 2-. 2 . p e r  over actual retained earnings.  5 . 6 and 6 . 1 p e r  +  for inventory g a i n s ,  .788D  t  were unadjusted.  fiD = 3 5 2 . 3 -h 1 5 •  cent  Corresponding figures  for inventory gains  were  cent.  L i n t n e r c o n c l u d e d that ". . . our b a s i c m o d e l  incorporates  the d o m i n a n t d e t e r m i n a n t s  of  corporate  •' ' 19  dividend decisions . . . . "  ..  Criticisms D a r l i n g b o t h c h a l l e n g e d and e x t e n d e d  Lintner's  f i n d i n g s by i l l u s t r a t i n g the i m p o r t a n c e of c h a n g i n g l i q u i d i t y and e x p e c t a t i o n s . ' I n 1 9 3 2 , a y e a r t e r i z e d by a l o w l e v e l o L b u s i n e s s g e n e r a l l y low l i q u i d i t y , ' t h e  charac-  c o n f i d e n c e and  Lintner model overesti-  m a t e d a c t u a l d i v i d e n d s by 2 6 . 7 p e r c e n t . . In 1 9 3 5 , when e x p e c t a t i o n s underestimated  and l i q u i d i t y w e r e u p , the m o d e l  d i v i d e n d s by 1 4 . 3 p e r cent-.  L i n t n e r - ' s m o d e l s h o w e d a- good o v e r a l l f i t , 1 8  Ibid.  1 9'  Ibid. , p.  113.  Although predictions  107 for i n d i v i d u a l years  w h e n e x p e c t a t i o n s and  liquidity  p o s i t i o n w e r e i n a s t a t e of t r a n s i t i o n w e r e c o n c l u d e d 20 to be q u i t e i n a c c u r a t e .  However, D a r l i n g ' s  may have been e x a g g e r a t e d  because  i n the t i m e p e r i o d u s e d f o r h i s  of the  claim  extremities  study.  O t h e r s h a v e q u e s t i o n e d the r e l i a b i l i t y of  Lint-  n e r ' s s a m p l e and w h e t h e r i t m i g h t be a s o u r c e of p o s s i b l e e r r o r s ; t h e y c l a i m e d that i t was s m a l l , picked,  and r e p r e s e n t a t i v e 21  corporations.  of o n l y l a r g e ,  hand-  diversified  H o w e v e r , the i n i t i a l p u r p o s e  of  n e r ' s s t u d y was to p r e d i c t a g g r e g a t e c o r p o r a t e  Lintsaving,  a n d i n the A m e r i c a n e c o n o m y l a r g e i n d u s t r i a l c o r p o r a t i o n s do d e t e r m i n e the b u l k of s u c h s a v i n g . more,  Further-  L i n t n e r was q u i t e a w a r e of t h i s p o t e n t i a l  ticism.  He s t a t e d :  " . . . the c o m p a n i e s w e r e not  crise-  l e c t e d as a s a m p l e u p o n w h i c h to d r a w s t a t i s t i c a l c o n 22 e l u s i o n s .." 9  o  P . G . D a r l i n g , " T h e I n f l u e n c e of E x p e c t a t i o n s and L i q u i d i t y on D i v i d e n d P o l i c y , " J o u r n a l o f P o l i t i c a l E c o n o m y , v o l . L X V ( J u n e 19 5 7 ) , p p . 20 9- 22T. : 21 B i c k s l e r , o_p_. c i t . , p . 5 3 . 22 L i n t n e r , D i s t r i b u t i o n s of I n c o m e s , " p . 9 9 .  108 G r u n f e l d and G r i l i c h e s h a v e q u e s t i o n e d how the Lintner dividend hypothesis,  w h i c h was i n the form, of  a m a c r o - m o d e l , c o u l d e v e r e x p l a i n the d i v i d e n d d e c i sion process  i n the f i r m ,  at the m i c r o l e v e l , 23  g a t i n g data f o r t w e n t y - e i g h t Tarshis, paper,  i n an i m m e d i a t e r e p l y to L i n t ne r ' s  n o t e d t h a t the r e s u l t s  and o t h e r f a c t o r s 9  policy. gested  aggre-  firms.  appeared  i n the l i g h t of c h a n g i n g c o r p o r a t e taxes  by  a l i t t l e too g o o d  and p e r s o n a l i n c o m e  that m i g h t i n f l u e n c e d i v i d e n d  A  ^ A s a r e s u l t of t h i s o b s e r v a t i o n T a r s h i s that a l t e r n a t i v e  e x p l a n a t i o n s of L i n t n e r ' s  re-  s u l t s may e x i s t . P e r h a p s f i r m s have a d i f f e r e n t p a y o u t r a t i o ( r ) and s p e e d of a d j u s t m e n t v a r i o u s l e v e l s of p r o f i t s . a firm  factor  i n t - ( - l , the f i r m  r and  s o r t of r e s u l t s  P r o f e s s o r - L i n t n e r ' s . I do not u n d e r s t a n d 2  earnings  This alternative  w o u l d g i v e " . . . the s a m e  rejected."  (c) f o r  may a p p l y a d i f f e r e n t  c to t h i s i n c r e m e n t i n e a r n i n g s . pothesis  target  For example, if in period t  i s m o v i n g t o w a r d s r at a r a t e of c and  increase  sug-  hyas  how i t c a n be  5  23y. G r u n f e l d and Z . G r i l i c h e s , "Is A g g r e g a t i o n N e c e s s a r i l y B a d ? " R e v i e w of E c o n o m i c s and S t a t i s t i c s , v o l . 42 ( F e b r u a r y I 9 6 0 } , p p . 1- 13 . 24  L. Tarshis, "Comment," American Economic Review , v o l . X L V I (May 1956), p . " T T C 25 Ibid.  109 As a consequence B r i t t a i n has e l a b o r a t e d p l a c i n g the f i x e d  of the T a r s h i s  criticism,  on the b a s i c m o d e l by  re-  l o n g - r u n t a r g e t r a t i o by a t a r g e t  f u n c t i o n w h i c h v a r i e d o v e r t i m e w i t h t a x and factors.  Further,  net p r o f i t s  were r e j e c t e d  other as a m e a -  s u r e of the a b i l i t y to pay d i v i d e n d s and w e r e by c a s h f l o w s . related  Cash flows are  replaced  much more h i g h l y c o r -  with d i v i d e n d s over time than are p r o f i t s ,  i s i l l u s t r a t e d i n F i g u r e 3 . B u t F i g u r e 3 and to the s a m e e f f e c t has w a r n e d , compare  are  misleading because,  as  statements as  Weston  a b i a s e x i s t s i n any s t a t i s t i c a l a t t e m p t  to  the i n f l u e n c e of c a s h f l o w s on d i v i d e n d s to 9B  the i n f l u e n c e of p r o f i t s  on d i v i d e n d s .  O t h e r c r i t i c s have s t r e s s e d to e x p l a i n the t a r g e t r a t i o , firms,  why i t v a r i e s  and how i t was c h o s e n . ^  a n a l y s i s of the f a c t o r s  Indeed,  factor  systematic  the  target  was m a d e .  t h e s e c r i t i c s f e l t the m o d e l was  i n s p i t e of the v a l i d i t y of the  failure  between no  influencing either  r a t i o o r the s p e e d of a d j u s t m e n t c a u s e of t h i s ,  the m o d e l ' s  Be-  vague  conclusions.  26 W e s t o n and B r i g h a m , M a n a g e r i a l F i n a n e e , p 482. 27 p . 20 .  Bicksler,  op.  c i t . , p.  55; B r i t t a i n ,  op.  cit. ,  60 D i v i d e n d s as a pe r c e n t a g e of net p r of i t s  40 Per  D i v i d e n d s as a pe r c e n t a g e o f cash flo s  cent  20  0 1957  59  61 Year  63  65  FIGURE 3 P R O F I T S V E R S U S C A S H F L O W S AS A D E T E R M I N A N T O F T H E D I V I D E N D D E C I S I O N IN T H E U N I T E D S T A T E S , 1 957 T O 1966 S o u r c e : " D i v i d e n d s F e e l the P r e s s u r e , B u s i n e s s W e e k , M a r c h 1 8 , 1 9 6 7 , p 59 .  Ill D h r y m e s and K u r z o b s e r v e d i n a s t u d y of e l e c t r i c u t i l i t i e s t h a t the a g g r e g a t e p a y o u t r a t i o was m a r k a b l y s t a b l e o v e r the y e a r s ,  re-  yet i n d i v i d u a l f i r m s 9  d i s p l a y e d v a r i a t i o n s i n the p a y o u t r a t i o f r o m The authors  specifically  1.8.  c r i t i c i z e d the o r i g i n a l L i n t n e r  formulation for its autoregressive sequent  0 to  n a t u r e and i t s c o n -  l i m i t a t i o n to s h o r t - r u n p r e d i c t i o n s of  aggre-  gate d i v i d e n d s . In s p i t e of t h e s e c r i t i c i s m s L i n t n e r ' s w o r k m a i n s the c l a s s i c i n the d i v i d e n d d e c i s i o n a r e a . f o r m u l a t i o n has b e e n m o r e w i d e l y u s e d and  re-  His  extended  t h a n any o t h e r . L a t e i n 1966 B i c k s l e r c o m m e n t e d : A t t h i s p o i n t i n t i m e , i t i s f e l t t h a t the L i n t n e r m o d e l i s the m o s t s u c c e s s f u l a t t e m p t to e x p l a i n 9 the d e t e r m i n a n t s of d i v i d e n d b e h a v i o u r of the f i r m . I V . DIVIDEND M O D E L S A P P L I E D TO C A N A D I A N  DATA  Purpos e T h e p u r p o s e of t h i s s e c t i o n i s to t e s t hypotheses  b a s e d on the r e s u l t s . o f the  and o b s e r v a t i o n s  of f i n a n c i a l  data a n d ,  various  questionnaire in this way,  to  P . J . D h r y m e s and M . . K u r z , " O n the D i v i d e n d P o l i c y , of E l e c t r i c U t i l i t i e s , " R e v i e w of E c o n o m i c s a n d S t a t i s t i c s , v o l . X L V I ( F e b r u a r y 1964), p. 76. Bicksler,  op. c i t . , p.  56.  112 i n d i c a t e the n a t u r e of the d i v i d e n d d e c i s i o n i n C a n a d a . A n a l t e r n a t i v e a p p r o a c h to L i n t n e r ' s ' was s e l e c t e d the f o l l o w i n g  for  reasons:  (1) o b s e r v e d i n t e r - i n d u s t r y d i f f e r e n c e s  in d i v i -  dend b e h a v i o u r ; (2) d o u b t s as to the i m p o r t a n c e of p a s t d i v i d e n d s in many s e c t o r s respondents  of the e c o n o m y ( O v e r o n e - h a l f of the  d e n i e d t h a t the q u e s t i o n of c h a n g i n g p a s t  d i v i d e n d s was m o s t (3) n u m e r o u s  important.); c l a i m s t h a t no t a r g e t p a y o u t  ratio  existed; (4) c r i t i c i s m s s u b s e q u e n t  to the o r i g i n a l L i n t n e r  f ormulation. B e c a u s e the d i v i d e n d p o l i c y of d e c l i n i n g panies  i s u s u a l l y m o r e o b v i o u s and b e c a u s e  make d i v i d e n d payments  com-  firms  out of n e g a t i v e i n c o m e  which  would  not be e x p e c t e d to f o l l o w a l i n e a r e x t e n s i o n of the  be-  haviour observed for f i r m s having positive i n c o m e , o n l y f i r m s w i t h at l e a s t n e a r - a v e r a g e t e r i s t i c s were D h r y m e s and  charac-  considered. Kurz  T h e i n i t i a l and i n t e r m e d i a t e in a later part  growth  models  (described  of t h i s s e c t i o n ) w e r e a d a p t e d f r o m  u s e d by D h r y m e s and K u r z i n a s t u d y of e l e c t r i c  two utility  113 dividend practices.  30  (14) D = a - f B Q  T h e i r b a s i c m o d e l i s as f o l l o w s : o  P + B  1  H - B  W h e r e : D = a m o u n t of d i v i d e n d s  (LTD)  2  +B Z g  paid  P = profit I = inv e s t m e n t  LTD = indebtedness Z  =  control  B ' s = net Because  variable  regression  coefficients  of i t s i m p o r t a n c e ,  an i n d e p e n d e n t v a r i a b l e . and to o v e r c o m e  In o r d e r  to i s o l a t e  its  as  effect  the m u l t i c o l l i n e a r i t y b e t w e e n i t and  the o t h e r v a r i a b l e s , dividends  s i z e was a l s o i n c l u d e d  m o s t of the v a r i a b l e s  w e r e n o r m a l i z e d by  The D h r y m e s  including  size.  and K u r z s t u d y  concluded  that: 9  1.. T h e c o e f f i c i e n t  of d e t e r m i n a t i o n ,  R  ,  was  . 530 . 2. P r o f i t s  were  significant.  3.. S i z e was h i g h l y s i g n i f i c a n t ;  small firms  a r e l a t i v e l y lower d i v i d e n d than l a r g e  firms.  4. I n v e s t m e n t and i n d e b t e d n e s s v a r i a b l e s n e g a t i v e and s i g n i f i c a n t  at  10 p e r  5. T h e c o n t r o l v a r i a b l e regulation)  and K u r z ,  op.  were  cent.  ( d e g r e e of  was p o s i t i v e and s i g n i f i c a n t  Dhrymes  paid  c i t . , p.  government  at 5 p e r 79.  cent.  114 6. T w o a d d i t i o n a l v a r i a b l e s ,  l i q u i d i t y and  vari-  a b i l i t y of i n c o m e , w e r e i n s i g n i f i c a n t when a d d e d . The a u t h o r s suggested  t h a t t h e i r c h o i c e of i n d u s t r y  was not a good one b e c a u s e of the s e m i p o l i t i c a l i n v o l v e d and the d i f f i c u l t y the c o n t r o l l i n g p o w : e r  s  factors  in quantifying differences  in  of l o c a l r e g u l a t o r y c o m m i s s i o n s .  T h e m e t h o d u s e d by D h r y m e s and K u r z to n o r m a lize r e g r e s s i o n equations correlation.  was e x a m i n e d f o r  spurious  P e a r s o n was the f i r s t s t a t i s t i c i a n to o b -  s e r v e t h a t the c o r r e l a t i o n b e t w e e n d e p e n d e n t and i n d e p e n d e n t r a t i o s h a v i n g a c o m m o n d e f l a t o r c a n be larger  t h a n the c o r r e l a t i o n b e t w e e n the 31  series.  numerator  H o w e v e r , M e y e r and' K u h h a v e e x a m i n e d i n  d e t a i l the p r e c i s e q u e s t i o n at h a n d and h a v e e x p l a i n e d t h a t s u c h s p u r i o u s c o r r e l a t i o n c a n e x i s t i n any s i o n a n a l y s i s o n l y w h e n an h y p o t h e s i s p e r t a i n s  regresto u n -  d e f l a t e d v a r i a b l e s ; an h y p o t h e s i s f o r m u l a t e d i n t e r m s of r a t i o s  s u c h as p a y o u t i s b i a s f r e e .  Furthermore,  the c a s e of s i z e d e f l a t i o n w i t h c o m p a n y , nal data,  in  cross-sectio-  an u p w a r d b i a s e x i s t s o n l y when s o m e of the .  K . P e a r s o n , " O n a F o r m of S p u r i o u s C o r r e l a t i o n w h i c h M a y A r i s e when I n d i c e s A r e U s e d i n the M e a s u r e m e n t of O r g a n s , " P r o c e e d i n g s of the R o y a l S o c i e t y of L o n d o n , v o l . L X ( 1897 ) , p p . "3 8~9"^~4 9~o":  115 variables . . . assume negative values . . . jlind further t h i s b i a s , i f p r e s e n t T j . . . s h o u l d not be v e r y l a r g e . . . s i n c e the s m a l l e r f i r m s , c a n n o t , r e l a t i v e to the l a r g e r f i r m s , h a v e v a l u e s v e r y f a r f r o m the o r i g i n . T h u s , u n d e r a w i d e r a n g e - o f c i r c u m s t a n c e s , the r a t i o e s t i m a t e s s h o u l d not be g r e a t l y b i a s ed i n a p p l i c a t i o n s to c r o s s - s e c tion data. Initial  Model S t r u c t u r e . The f i r s t m o d e l , d e p i c t e d i n F i g u r e  4 , was d e s i g n e d to i n c o r p o r a t e g o r i e s of e x p l a n a t o r y  cate-  variables.  Dependent variable Common dividends  several broad  Independent variables  (Future , Present prospects p rofits after tax and preferred d ividends  Size, Present and planned investment  ;  Long, Working) term capital debt  Category A  C  B  D  FIGURE 4 INITIAL  MODEL  J . R. Meyer and E . Kuh, The Investment Decision, An Empirical Study, Cambridge, Massachusetts, Harvard University Press, 1957, pT 2(34; see also C . Christ and G. Orcutt, "Correlation and Regression Estimates When the Data are Ratios, " Econometrica, vol. XXUI (October, 1955), pp. 400-416. Thus no significant bias entered the results of the studies in this Section especially since, for reasons stated, declining companies were not considered. In the all-industries sample only five negative investment variables were present and in the forest products sample, none. Any of the observations of the variable representing cash needs that were negative were set to zero.  .  .i  116  T h e c o m p o n e n t s of e a c h of the f o u r c a t e g o r i e s  were  e x p e c t e d to h a v e an i m p a c t on the d e c i s i o n to pay commondividends.  The future  p r o s p e c t s v a r i a b l e (A)  was e m b o d i e d i n the m o d e l not o n l y . t o r e f l e c t i m p a c t of the b u s i n e s s for  the f i r m  the p r e s e n t  the  c y c l e and the e x p e c t e d o u t l o o k  and the i n d u s t r y but a l s o to c o m p l e m e n t p r o f i t v a r i a b l e . A c c o r d i n g to the  of the q u e s t i o n n a i r e ,  results  d i r e c t o r s do not c h a n g e the d i -  v i d e n d on the b a s i s of p r o f i t a l o n e but m u s t be  confi-  dent of c o n t i n u e d , s t e a d y p r o f i t s . - M e a s u r e m e n t of future  prospects  w a s o r i g i n a l l y c o n c e i v e d on the  m i s e that management  pre-  c o n s i d e r s the s a l e s i n c r e a s e i n  the c u r r e n t y e a r as w e l l as t h e , s a l e s  forecast  c o m i n g ye'ar as i n d i c a t i v e of the f u t u r e .  for  the  B e c a u s e of  the h i g h d e g r e e of u n c e r t a i n t y u s u a l l y a s s o c i a t e d ' w i t h the d i s t a n t f u t u r e , , l o n g - t e r m e s t i m a t e s to be h i g h l y c o r r e l a t e d b o t h w i t h p r e s e n t w i t h the i m m e d i a t e - f u t u r e sales increase  were  presumed  success  outlook. Consequently,  i n t h e y e a r t h a t the d a t a w e r e  ( 1 9 6 4 ) was . a v e r a g e d w i t h the i n c r e a s e i n the  subsequent firm  and p a y i n g p o w e r and i s the m a j o r m e a n s of  c o m m u n i c a t i o n to the s h a r e h o l d e r , his attitude reflect  the  used  y e a r - ( 1965). The p r o f i t v a r i a b l e (B) r e f l e c t s both efficiency  and  a d e t e r m i n a n t of  and d e m a n d . S i z e and i n v e s t m e n t  d y n a m i c d e v e l o p m e n t , and m o r e  (C) a l s o  specifically,  f i n a n c i a l p o w e r ( e a s e of f i n a n c e ) and t e n d e n c y to g r o w t h .  117 Investment  i n the c u r r e n t  y e a r ( 1 9 6 4 ) was  averaged  w i t h t h a t i n the f o l l o w i n g y e a r to a p p r o x i m a t e the i n vestment program's  i m p a c t on the d r a i n of f u n d s .  S i z e was m e a s u r e d by t o t a l a s s e t s .  D e b t and  working  c a p i t a l (D) r e f l e c t the c u r r e n t p o s i t i o n , e s p e c i a l l y the e f f e c t of c a p i t a l s t r u c t u r e ,  financial  risk,  and  liquidity. The  m o d e l a s s u m e d t h e s e c o m p o n e n t s to be  g i v e n o r p r e d e t e r m i n e d and the d e p e n d e n t dividend payments, ther, to  preferred  variable,  to be the d e c i s i o n v a r i a b l e .  Fur-  dividends were c o n s i d e r e d equivalent  interest. The  r e g r e s s i o n e q u a t i o n w h i c h i s b a s e d on the  m a t e r i a l i n F i g u r e 4 i s as  follows:  (15) D = a - + B F P f B P + B S + B 0  1  2  3  A l l v a r i a b l e s e x c e p t s i z e and f u t u r e n o r m a l i z e d by  4  INV+B5LTD+BgWC  prospects  were  size.  B o t h the i n i t i a l m o d e l and the r e g r e s s i o n t i o n i n c o r p o r a t e d , i n one way o r a n o t h e r ,  equa-  a l l factors  c o n s i d e r e d v e r y i m p o r t a n t by q u e s t i o n n a i r e  respondents  e x c e p t p a s t d i v i d e n d s . T h e s e c o u l d not l o g i c a l l y be i n c l u d e d a l t h o u g h they appear inherent  to r e p r e s e n t  conservative nature.  managements'  If i n m o s t c a s e s the  independent v a r i a b l e s remained unchanged over years,  the d i v i d e n d w o u l d r e m a i n u n c h a n g e d ,  p a s t d i v i d e n d w o u l d be h i g h l y c o r r e l a t e d w i t h  same  the  and the the  118 current ficant  d i v i d e n d and w o u l d be t e r m e d a h i g h l y  e x p l a n a t o r y v a r i a b l e . M u c h of the  i s a c c o u n t e d f o r by e x p e c t a t i o n s tors (future ample).  prospects  signi-  conservatism  and the d y n a m i c f a c -  and i n v e s t m e n t  T h e e l e m e n t of u n c e r t a i n t y  plans, for  ex-  w h i c h i s not  a c c o u n t e d f o r by the d y n a m i c v a r i a b l e s r e f l e c t s  the  c o n s e r v a t i s m not e x p l a i n e d by the m o d e l . B e c a u s e of i t s o b s e r v e d i m p o r t a n c e ( A p p e n d i x D) and b e c a u s e of i t s r e l a t i o n to f i n a n c i n g p l a n s , important factor, questionnaire  s i z e ( a l t h o u g h not l i s t e d on the  f o r r e a s o n s s t a t e d on page 8 9) was  to the r e g r e s s i o n e q u a t i o n . capital structure, by d i r e c t o r s ,  an  Also,  added  b o t h f i n a n c i n g and  which were c o n s i d e r e d  important  a r e r e f l e c t e d i n the m o d e l by l o n g - t e r m  debt. R e g r e s s i o n r e s u l t s . T h e m o d e l was t e s t e d 1964 d a t a f r o m  with  t w e n t y - f i v e c o m p a n i e s i n the f o r e s t  d u c t s i n d u s t r y (.see A p p e n d i x G ) . T h e F i n a n c i a l S u r v e y of I n d u s t r i a l s  pro-  Post  1966 p r o v i d e d t h i s i n f o r m a t i o n .  R e s u l t s of the t e s t i n g a p p e a r i n T a b l e X I V .  TABLE. XIV I N I T I A L M O D E L A P P L I E D T O 25 F I R M S IN T H E F O R E S T I N D U S T R Y , 1964  Variable  o B (FP) A  Net regression Standard coefficient error  F-ratios  0. 013 - 0. 0995  0. 0411  5.8710  B (P)  0. 3737  0. 1079  Bg(S)  0. 0598  B (D  X  2  4  B (LTD) 5 B (WC) 6  F-test Partial significance correlation level coefficient t-test ' significance level  5%  1%  11.9955  1  1  0. 0262  5,1950  5  1  0. 0175  0. 0361  0.2356  not sig.  15  - 0. 0194  0. 0207  0.8861  not sig.  5  0. 0005  0. 0134  0.0013  not sig.  not  R = 0.806 R  2  = 0.648  120  T h e v a r i a b l e s e x p l a i n e d 65 p e r c e n t of the 9  v a r i a t i o n i n d i v i d e n d s i n the f o r e s t v e r y s i g n i f i c a n t u n d e r the  industry. R  was  F-itest.  That future' p r o s p e c t s  were highly s i g n i f i c a n t  c o u l d be the r e s u l t of one of two s i t u a t i o n s a r i s i n g from  e x p e c t e d h i g h p r o f i t s i n the f u t u r e : a c o r r e s -  p o n d i n g i n c r e a s e i n d i v i d e n d s o r s t i m u l a t i o n of i n v e s t m e n t p l a n s and a c o n s e q u e n t  need f o r f u n d s .  t i v e c o e f f i c i e n t i n d i c a t e d the l a t t e r .  coefficient  and i n v e s t m e n t ,  nega-  Although a high  c o r r e l a t i o n w o u l d t h e n be ' e x p e c t e d b e t w e e n prospects  The  future  the p a r t i a l c o r r e l a t i o n  b e t w e e n the two was not s i g n i f i c a n t . T h i s  a p p a r e n t p a r a d o x w o u l d be r e c o n c i l e d i f m u c h of the i n v e s t m e n t u n d e r t a k e n was b a s e d on v e r y l o n g - t e r m e x p e c t a t i o n s and was not n e c e s s a r i l y e x p e c t e d to be p r o f i t a b l e i n the i m m e d i a t e f u t u r e .  T h i s s i t u a t i o n may  be u n i q u e to the f o r e s t i n d u s t r y and m a y be the of the s y s t e m of t i m b e r a l l o t m e n t ( s u c h as the a n t e e of a m i l l ) i n one o r m o r e of the m a j o r  result guar-  forestry  provine es. B 2 m a y be i n t e r p r e t e d as the m a r g i n a l p r o p e n s i t y to pay d i v i d e n d s out of p r o f i t s . f i t i n c r e a s e the e q u a t i o n ' s  F o r e v e r y d o l l a r of p r o -  point estimate  v i d e n d i n c r e a s e of t h i r t y - s e v e n  yielded a d i -  cents.  T h e p o s i t i v e s i g n of B g i n d i c a t e d that firms  pay h i g h e r d i v i d e n d s ; t h i s r e s u l t was  larger expected  121 because  l a r g e f i r m s are often more r e a d i l y accepted  by i n v e s t o r s and g e n e r a l l y h a v e g r e a t e r cing.  ease in f i n a n -  S m a l l e r f i r m s a r e f o r c e d to f i n a n c e a l a r g e r  p o r t i o n of t h e i r i n v e s t m e n t by i n t e r n a l  means.  T h e i n s i g n i f i c a n c e of the i n v e s t m e n t m a y be a t t r i b u t e d to w e a k n e s s Or,  variable  i n the m e a s u r e  used.  the p e r i o d ' s e x p a n s i o n m a y h a v e b e e n f i n a n c e d  separately from  outside sources.  O r , the f o r e s t i n -  d u s t r y may have been a bad e x a m p l e b e c a u s e tremendous  of the  e x p a n s i o n by a l m o s t a l l c o m p a n i e s i n the  period studied.. More.likely however,  heterogeneous  results  G r o w t h or  high  i n v e s t m e n t f i r m s not o n l y n e e d o u t s i d e f u n d s and  con-  s e q u e n t l y good r e l a t i o n s w i t h the c a p i t a l m a r k e t  (these  w e r e due to c o n f l i c t i n g n e e d s .  n e e d s a r e m u c h l e s s i m p o r t a n t to s t a g n a n t f i r m s ) , also may r e c e i v e other benefits  from  a generous  but  divi-  d e n d p o l i c y ( s u c h as s h o r t - r u n p r i c e a p p r e c i a t i o n ) . This tendency for high dividends c o n f l i c t s i m m e d i a t e need f o r  with  the  funds.  A l t h o u g h l o n g - t e r m debt was i n s i g n i f i c a n t , i t s i n c l u s i o n was i n t e n d e d to r e f l e c t the h y p o t h e s i s  that'  h i g h l y i n d e b t e d f i r m s w o u l d r e d u c e debt to a p p r o a c h a preferable  (less r i s k y ) c a p i t a l structure  tain earnings for this purpose. coefficient  Indeed,  indicated this tendency.  p a y m e n t i n the p r e s e n t m e a n i n g to d i r e c t o r s .  and w o u l d the  negative  Perhaps,  and i m m e d i a t e f u t u r e  re-  debt ire..-has  greater  122 T h a t the l i q u i d i t y v a r i a b l e f a i l e d consistent  w i t h the h y p o t h e s i s .  may s t i l l  Although cash  w e r e s t a t e d by s e v e r a l d i r e c t o r s  be  resources  to be i m p o r t a n t ,  the  very important  v a r i a b l e was the p r e s e n t and  anticipated  need for c a s h .  The a s s u m p t i o n that a low w o r k i n g c a -  p i t a l p o s i t i o n means a g r e a t e r need f o r c a s h i s bably  pro-  incarrect. T h e i n i t i a l m o d e l has e x p l a i n e d , d i v i d e n d p a y -  m e n t s of c o m p a n i e s profits,  future  i n the f o r e s t  prospects,  i n d u s t r y i n t e r m s of  and s i z e . B e c a u s e  certain  v a r i a b l e s w e r e c l e a r l y s i g n i f i c a n t and v i c e v e r s a , a t t e m p t was m a d e to u s e the s t e p w i s e n i q u e on t h i s  regression  domly selected from a l l i n d u s t r i e s was r e a d i l y a c c e p t e d  a l t h o u g h the r e s u l t s forestry  tech-  model.  T h e s a m e m o d e l was a p p l i e d to s i x t y f i r m s  hypothesis  no  (Appendix G ) . The  by the  F-test  (R = . 5 6 0 )  w e r e not as s u c c e s s f u l as w i t h  firms .  '  T h e f o ITO'W'ing w e r e  ran-  the  •  observed:  1. P r o f i t s and s i z e w e r e b o t h s i g n i f i c a n t at 1 per cent  (F-test);  indebtedness  was s i g n i f i c a n t o n l y at  2 0 p e r c e n t and the o t h e r s w e r e e v e n l e s s 2. correlated  Future prospects  and i n v e s t m e n t s  significant. were highly  ( p a r t i a l c o r r e l a t i o n c o e f f i c i e n t of . 5 8 )  p o r t i n g the t e n t a t i v e  e x p l a n a t i o n on page;;  120-.:..'.  sup-  123 3. nificant  Simple c o r r e l a t i o n yielded indebtedness at 2-jjr p e r c e n t and f u t u r e  sig-  p r o s p e c t s at 15 p e r  cent. 4 . . M a r g i n a l p r o p e n s i t y to p a y d i v i d e n d s was . 24. . The  profit,  size,  and l i q u i d i t y v a r i a b l e s i n the  i n i t i a l m o d e l showed s i m i l a r  r e s u l t s to the e q u i v a l e n t  v a r i a b l e s i n the D h r y m e s and K u r z m o d e l ,  but  long-  t e r m debt and i n v e s t m e n t w e r e m o r e s i g n i f i c a n t i n t h e i r tests. Intermediate  Model  S t r u c t u r e . The i n t e r m e d i a t e m o d e l (also patterned after  one by D h r y m e s and K u r z ) was d e s i g n e d  to t e s t the e f f e c t  of b a s i c a l l y the s a m e  independent  v a r i a b l e s as s h o w n i n F i g u r e 4 , page 11-5', but on p a y out r a t i o . Common , Profitability, Size, Investment, Long, Working) dividends = (Future prospects ' term capital Profits debt after taxes and preferred dividends FIGURE 5 INTERMEDIATE Four  independent v a r i a b l e s  to i s o l a t e  size.  MODEL  w e r e n o r m a l i z e d by  size  124 Regression results.  The e x p l a n a t o r y v a r i a b l e s  e x p l a i n e d 44 p e r c e n t of the v a r i a t i o n i n p a y o u t  ratio  and the h y p o t h e s i s was s t i l l e a s i l y a c c e p t e d by the F-test.  F u t u r e p r o s p e c t s and s i z e w e r e  a l t h o u g h not as s i g n i f i c a n t profit  measure  significant,  as i n the f i r s t  model.  now r e f e r r e d to p r o f i t a b i l i t y  came much less s i g n i f i c a n t  and b e -  ( s i g n i f i c a n t at 15 p e r  w h i c h i s c o n s i s t e n t w i t h the h y p o t h e s i s t h a t  The  cent),  profit-  a b i l i t y i s c o n s i d e r e d to h a v e o n l y s o m e i m p o r t a n c e . T h e f a c t t h a t the c o e f f i c i e n t  was n e g a t i v e a l s o  the t h e o r e t i c a l i m p l i c a t i o n s t h a t g r e a t e r s h o u l d l e a d to g r e a t e r  profitability  r e t e n t i o n . I n v e s t m e n t and w o r -  king c a p i t a l were s t i l l i n s i g n i f i c a n t , two e l e m e n t s  and w h e n t h e s e  were dropped (stepwise r e g r e s s i o n )  o v e r a l l r e s u l t s d i d not c h a n g e .  L o n g - t e r m debt  s i g n i f i c a n t at 10 p e r c e n t and had a n e g a t i v e cient.  Again,  supports  the  was  coeffi-  none of the p a r t i a l c o r r e l a t i o n c o e f f i -  c i e n t s b e t w e e n the i n d e p e n d e n t v a r i a b l e s w e r e n e a r l y l a r g e e n o u g h to w a r r a n t c o m b i n i n g  them.  T h e a v e r a g e p a y o u t r a t i o was 4 6 per  cent.  TABLE XV I N T E R M E D I A T E M O D E L A P P L I E D T O 25 I N T H E F O R E S T I N D U S T R Y , 1964  Variable  o B^FP) A  Standard error  Net regression coefficient  F-ratios  FIRMS  F-test significance level  .803 1.3923 .  0.6134  5.1521  5%  B (P)  - 2.5827  1.6120  2.5671  15  Bg(S)  0.7124  0.3921  3.3006  10  B (I)  0.6916  0.5398  1.6419  20  B (LTD)  0.5818  0.3086  3.5543 •  10  - 0.0718  0.2001  0.1286  not sig.  2  4  5  B.(WC) 6  R = 0.662 R  2  = 0.438  126 The i n t e r m e d i a t e  m o d e l was a l s o a p p l i e d to  the s i x t y f i r m s . H o w e v e r , the h y p o t h e s i s j e c t e d by the level,  F-test  at the  5 per cent  was  re-  significance  and none of the v a r i a b l e s w e r e s i g n i f i c a n t at  e v e n the  10 p e r c e n t  level.  The obvious c o n c l u s i o n  was that t h i s m o d e l has a d e q u a t e e x p l a n a t o r y  ability  w h e n a p p l i e d to a p a r t i c u l a r i n d u s t r y but f a i l e d account for i n t e r - i n d u s t r y Final  to  differences.  Model S t r u c t u r e . T h e f i n a l m o d e l was i n t e n d e d  e x t e n d the a n a l y s i s by s t r u c t u r i n g a m o r e and i n c l u s i v e h y p o t h e s i s  b a s e d on the  r e c e i v e d f r o m the r e t u r n e d pothesis  to  rigourous  information  questionnaires.  T h i s hy-  is d e l i n e a t e d i n F i g u r e 6 w h i c h shows  interrelationships  between  many f a c t o r s  and  the  their  r e l a t i o n s h i p to the d i v i d e n d d e c i s i o n . T h e t e r m servatism refers dividend,  to the d e s i r e  to s t a y w i t h the o l d  t h a t i s , the d i r e c t o r s '  h e s i t a n c y to  d i v i d e n d s i n s p i t e of a p p a r e n t h i g h p r o f i t s and favourable financial  figures.  con-  raise other  USE OF STOCK SPLITS,  DIVIDENDS  (3)  BUSINESS CYCLE CONDITIONS  STRUCTURE OF OWNERSHIP AND CONTROL GROUP  COMPANY POSITION  (U) PERSONAL TAX POSITION  COMPETITORS' PAYOUT RATIO  1—W  X -a)  SHARE PRTCE  UNCERTAINTY AND A T T I T U D E TOWARDS SAME  EXPECTED VARIABILITY IN EARNINGS OR TALES  1)  SHAREHOLDERS' ATTITUDES  2)  DIRECTORS' PERSONAL PRIDE  (3)  (3)  EXPECTED GROWTH IN EARNINGS AND SALES  INVESTORS' ATTITUDES  CONSERVATISM OR IMPORTANCE OF PAST DIVIDENDS  DIRECTORS' BIAS AGAINST DECREASE  CAPITAL MARKET  (1)  PRESENT PROFIT  COST OF CAPITAL  INTERNAL OPERATING RISKS  DIVIDEND  (1)  2) DEPRECIATION CAPITAL STRUCTURE (2) INTERNAL OPERATING RISK  COM PA NY SIZE  PRESENT A*T> ANTICIPATED NEED FOR CASH  \  71  FINANCING PLANS  Ti)  (2)  INVENTORY  PAY LONG TERM DEBT  RE  CHANGES  INVESTMENT PROJECTS  1 RATE OF ON  71  (1)  RETURN  CAPITAL (2)  MANAGEMENT ABILITY  NATURAL . ADVANTAGES  FIGURE 6 STRUCTURE OF THE DIVIDEND DECISION IN CANADA, BASED ON 33 DIRECTORS' STATED OPINIONS N o t e : Numbers n e x t t o t h e l o w e r , r i g h t c o r n e r o f some b o x e s i n d i c a t e the imp o r t a n c e o f t h e f a c t o r s as r a n k e d by t h e C a n a d i a n d i r e c t o r s ( r a n k i n g o f i m p o r t a n c e : (11 v e r y , (21 c o n s i d e r a b l y , (3) s o m e v h a t , (U) n o t ) .  (3) CAPITAL STRUCTURE  128 The f i n a l m o d e l ,  F i g u r e 7, i s a  condensation  of F i g u r e 6 and i s d e s i g n e d (1) to t a k e i n t o each broad category  of f a c t o r s  t h a t has an i m p a c t  the d e c i s i o n and (2) to i n c o r p o r a t e component for  factors  correlation  account  as m a n y of  as p o s s i b l e i n t o a m e a s u r e  on  the suitable  analysis.  Dividends = ^(Conservatism, Cash available, Cash needs, Size) Where: Conservatism = I (Expected.growth, Variability in growth, Uncertainty, J Reaction to uncertainty, Shareholders' attitudes) Cash available = j" (Profits, Depreciation) Cash needs = j (Investment, Planned inventory changes, Research, ) Debt reduction or increase, Capital stock changes) Ease of fund access, Low relative transaction costs, Economies of scale = •• (Size) FIGURE FINAL  7  MODEL  C o n s e r v a t i s m was m e a s u r e d  by the c h a n g e i n  d i v i d e n d s o v e r the c h a n g e i n p r o f i t s f o r a two period.  A l t h o u g h l a c k i n g i n the a b i l i t y to e x p l a i n the  importance factor  year  of e a c h c o n t r i b u t i n g v a r i a b l e ,  had the a d v a n t a g e of w e i g h i n g and  a l l these v a r i a b l e s  i n t o one f i g u r e .  p o n e n t s of the c a s h - f l o w - m e a s u r e ,  T h u s , the two v a r i a b l e s  single  synthesizing  Of the two c o m p r o f i t was  to have a g r e a t e r i m p a c t b e c a u s e of i t s qualities.  this  expected  informational  were used  separately  129 Of a l l the c o m p o n e n t s vestment, changes  of the c a s h - n e e d s v a r i a b l e , i n -  f u n d e d debt c h a n g e s ,  S i z e was a g a i n  and  were  measured  assets.  Regression results. cepted  stock  w e r e c o n s i d e r e d the m o s t i m p o r t a n t  c o m b i n e d i n t o one m e a s u r e . by t o t a l  and c a p i t a l  T h e m o d e l was e a s i l y  ( R . = : . 5 2 0 ) but was o n l y m o d e r a t e l y  when a p p l i e d to the s i x t y f i r m s . the o n l y v a r i a b l e s  cept c o n s e r v a t i s m were under s i m p l e  successful  P r o f i t s and s i z e  s i g n i f i c a n t at the  under m u l t i p l e a n a l y s i s .  ac-  1 per cent  were  level  However, a l l variables s i g n i f i c a n t at  10 p e r  ex-  cent  regression.  T h e f a c t t h a t the c o n s e r v a t i s m v a r i a b l e  failed  c o m p l e t e l y m a y be due to the i n a d e q u a c y of the  measure.  A p e r i o d l o n g e r t h a n two y e a r s  better  w o u l d have b e e n  t h a n the two y e a r p e r i o d s i n c e s o m e f i r m s w e r e i n the h a b i t of c h a n g i n g the d i v i d e n d a m o u n t i n two y e a r i n t e r v a l s . s u r e was a d e q u a t e ,  less  B u t to the e x t e n t  the r e s u l t s  often  than  that the  i n d i c a t e that the  meadegree  of c o n s e r v a t i s m has no c o n n e c t i o n w i t h the a m o u n t of dividends paid out.  T h i s q u a l i f i e d c o n c l u s i o n would  g e s t that p a s t d i v i d e n d s a r e  considered important  m a n y b e c a u s e of r e a s o n s s t a t e d on pages 1 1 7 . a n d  sug-  by 118.  T h e f a c t t h a t the d e p r e c i a t i o n v a r i a b l e was  not  e s p e c i a l l y s i g n i f i c a n t and the p r o f i t v a r i a b l e h i g h l y significant  i n d i c a t e d t h a t c a s h flow i s a l e s s  desirable  130. basic factor  than p r o f i t .  In s p i t e of the  b i a s i n f a v o u r of c a s h f l o w s , substantiated  inherent  this observation  was  in a subsequent check where both  f l o w s and p r o f i t s w e r e c o r r e l a t e d  cash  (simple) with  divi-  dends. Comments T h e m o d e l s h a v e i n d i c a t e d the r e l a t i v e t a n c e of the m a j o r  factors  i n v o l v e d i n the d i v i d e n d  d e c i s i o n i n C a n a d a and h a v e o v e r c o m e  certain  c i s m s of L i n t n e r ' s m o d e l , e s p e c i a l l y t h o s e its autoregressive ability.  impor-  n a t u r e and l a c k of  criti-  concerning  explanatory  '  Moreover,  the m e t h o d s  tain difficulties inherent  have d e m o n s t r a t e d  i n any s t u d y of t h i s  nature.  One of t h e s e i s the m e a n i n g f u l q u a n t i f i c a t i o n of ables  under  consideration,  w i t h the f u t u r e for  outlook; another  the i n t e r r e l a t i o n s h i p s  S t i l l another  e s p e c i a l l y those  dividend decision remains the d e c i s i o n p r o c e s s  concerned  the m a n y  variables.  f r o m the f a c t t h a t  a subjective  one,  and  the hence  may v a r y r a d i c a l l y among nearly  i d e n t i c a l f i r m s . T h u s , no m o d e l c a n a d e q u a t e l y the m e c h a n i s m f o r a p a r t i c u l a r f i r m financial data.  vari-  involves accounting  between  problem arises  cer-  explain  on the b a s i s of  S u c h a t a s k m u s t be l e f t to i n t e r v i e w i n g ,  and s u c h a s t u d y w o u l d e x t e n d i n t o the b e h a v i o u r a l M o d e l s d e s i g n e d to m e e t the o b j e c t i v e s , of t h i s must  remain  general.  field.  study  C H A P T E R VII AGGREGATE  ECONOMICS AND THE DIVIDEND  The author  DECISION  of one of the m o s t p e r c e p t i v e  p o n s e s to the q u e s t i o n n a i r e to the l o n g l i s t of f a c t o r s  suggested,  when  res-  referring  composing dividend policy,  . . . t h a t i t i s m o s t d i f f i c u l t to e v a l u a t e t h e m e x c e p t i n the l i g h t of c u r r e n t c o m p a n y and e c o n o mic c o n d i t i o n s . I suppose in another s e v e r a l years I might answer your questions ' differently . . . changing conditions would influence evaluation. Occasional remarks serted  by o t h e r s ;  on e c o n o m i c c o n d i t i o n s w e r e  such expressed  o p i n i o n s have  as-  inspired  thischapter. The o b j e c t i v e s  of the c h a p t e r  the d i v i d e n d d e c i s i o n f r o m the n o m i c s and (2) to c o n s i d e r variables,  are  l e v e l of a g g r e g a t e  policy.  eco-  the i m p a c t of a g g r e g a t e  and i n c o n j u n c t i o n w i t h t h e s e ,  macroeconomic  (1) to l o o k at  government  1  This chapter does not include an investigation of the entire macroeconomic area which is implicit in Figure 1 and which encompasses the effect of dividend decisions. ori''the national economy, and conversely, the effect of government policy on the dividend decision. Any attempt along these lines was rejected because of the scope involved and the intensive analysis required. The most complete and r i gourous, published study on dividends, entitled Corporate Dividend Policy, was done by John Brittain for the Brookings Institution. This treatise, written in the context of aggregate economics, concluded that depreciation liberality, corporate tax rates, individual tax rates, and interest rates are the four policy tools having an impact on the d i vidend decision in the American economy. The implications for and the intricacies involved with the entire public policy field were also ,  132 T h e c o n c l u s i o n on the m a j o r  component  variables  a r i s i n g f r o m the p o l l and a n a l y z e d i n C h a p t e r V I a r e repeated  here.  They i n c l u d e :  (1) c u r r e n t  profits;  (2) p r e s e n t and a n t i c i p a t e d n e e d f o r (3) p l a n n e d i n v e s t m e n t (4)  cash;  projects;  pastdividends;  (5) e x p e c t e d g r o w t h i n e a r n i n g s  and  (6) e x p e c t e d v a r i a b i l i t y i n e a r n i n g s The d i r e c t o r s  sales; or  sales.  w e r e p o l l e d i n M a r c h and  April  1 9 6 7 . T h e i r t h i n k i n g was l i k e l y c o n d i t i o n e d , i n p a r t , by the c u r r e n t  e c o n o m i c s i t u a t i o n ; by the l o n g f a v o u r -  a b l e e c o n o m i c p e r i o d b e g i n n i n g i n 1962 o r 1963 as c l e a r l y i n d i c a t e d by the q u e s t i o n n a i r e by f u t u r e  management  to g e n e r a l e c o n o m i c  expectations  financial  considerable studies  responses,  expectations.  With respect  current  and,  are  conditions,  l a r g e l y s u m m a r i z e d in  and e c o n o m i c l i t e r a t u r e  extent  f a l l s b a c k on m o r e  and f o r e c a s t s  w h i c h to a  intensive  such- as t h o s e r e p o r t e d  by the  examined by Brittain. Whether his conclusions are relevant to Canada is another question. The Report of the Royal Commission on Taxation finds no such evidence. Their research staff observed (as stated on pp. 146-148, volume 2) that only changes in capital cost allowances would " . . . probably have . . . [jan] impact . . . . " ; both corporation and personal tax rate changes were concluded to have no effect on the proportion of payout. See: Report of the Royal Commission on Taxation, chairman, K . Le M . Carter, Ottawa, Queen's Printer, V3W~  133 E c o n o m i c C o u n c i l of  Canada.  2  A g g r e g a t e d i v i d e n d s i n the p e r i o d of the tionnaire  w e r e up 8 p e r c e n t o v e r the  six-month period (January  to J u n e )  ques-  corresponding  of 1 9 6 6 , and a  r e c o r d d i v i d e n d y e a r was f o r e c a s t . ^  Seven  hundred  t h i r t y - s e v e n m i l l i o n d o l l a r s w e r e p a i d out by C a n a dian companies  i n the f i r s t h a l f of 1 9 6 7 .  Industrials  and p u b l i c u t i l i t i e s ( o n l y t h e s e two g r o u p s  were  sidered in this thesis)  of a b o u t 5  s h o w e d an i n c r e a s e 4  p e r c e n t o v e r the p r e v i o u s h a l f y e a r . dividend increases r i s i n g faster  con-  Although these  were' s t i l l c o n s i d e r a b l e  and  were  t h a n w o u l d be e x p e c t e d f r o m p r o f i t s  productivity,  the g a i n was s i g n i f i c a n t l y l e s s 5 14 p e r c e n t e s t a b l i s h e d i n 19 6.5 o v e r 1 9 6 4 .  than  or the  E c o n o m i c C o u n c i l of C a n a d a , F i r s t A n n u a l Re v i e'w , E c o n o m i c G o a Is f o r C ana da t o 1 9 V U , Que en ' 3 P r i n t e r~ O t t a w a , D e c e m T J e f 19 64; E c o n o m i c C o u n c i l of C a n a d a , S e c o n d A n n u a l R e v i e w , T o w a r d s S u s t a i n e d and B a l a n c e d E c o n o m i c G r o w t h , Q u e e n ' s P r i n t e r , 011awa , D e c e m b e r 19 6 5; FTconomic C o u n c i l of C a n a d a , T h i r d A n n u a l R e v i e w , P r-ic e s , P r o d u c t i v i t y and E m p l o y m e n t , Que e n ' s P r i n t e r , O t t a w a , N o v e m b e r 1 9 6 6 . 3  The  F i n a n c i a l Post  [ T o r o n t o l , J u n e 1 0 , 1 9 6 7 , p . 9.  4 Ibid . 5  T h e F i n a n c i a l P o s t S u r v e y of I n d u s t r i a l s , A S u r v e y of C a n a d i a n I n d u s t r i a I C o m p a n i e s P r epa r e d by the E d i t o r s of the F i n a n c i a l P o s t , T o r o n t o , M a c L e a n Hunter P u b l i s h i n g Company L i m i t e d , 1966, F o r e w a r d .  134 A t the t i m e the d i r e c t o r s w e r e p o l l e d ,  business  a c t i v i t y i n C a n a d a was e x p e c t e d to r i s e but at a s l o w e r p a c e t h a n i t had i n the p r e v i o u s f i v e y e a r s . s h o w s the i n c r e a s e s  in gross national product  1961 to 1966 and the g o v e r n m e n t e s t i m a t e d for  Figure 8 from  increase  1 9 6 7 . P r o f i t s w e r e b e g i n n i n g to d i m i n i s h  (see  F i g u r e 9 and T a b l e X V I ) . T h a t w o r k i n g c a p i t a l c o n d i 6 t i o n s had i m p r o v e d  and t h a t new i n v e s t m e n t i n 1967  was p r e d i c t e d to d e c r e a s e i n the m a n u f a c t u i n g i n d u s t r i e s (see  F i g u r e 10) i n d i c a t e d a l e s s e r n e e d f o r  cash.  A l e s s e r n e e d f o r c a s h c o u n t e r e d l o w e r p r o f i t s , and h e n c e d i v i d e n d s i n c r e a s e d m o r e t h a n w o u l d be e x p e c t e d on the b a s i s of p r o f i t  Ibid  alone.  7 6 5 4 Per cent  0-  1960  66 Year FIGURE 8  G R O S S N A T I O N A L P R O D U C T I N C R E A S E S , 1960 T O 1966 G O V E R N M E N T E S T I M A T E D I N C R E A S E 1967 (WITH'-'""." A D J U S T M E N T F O R PRICE CHANGES) S o u r c e : The F i n a n c i a l P o s t 1967 , p . 1 7 .  [Toronto] , June  10,  14 12 10  Per cent 4  0  1963  1964 Year  1965  1966  FIGURE 9 I N C R E A S E S IN C O M P A N Y P R O F I T S ,  1963 T O 1966  S o u r c e : D o m i n i o n B u r e a u of S t a t i s t i c s , N a t i o n a l A c c o u n t s , I n c o m e and E x p e n d i t u r e , F o u r t h Q u a r t e r and P r e l i m i n a r y A n n u a 1 R e p o r t f o r 1966 , v o l . 1 4 , n o . 4 ( A p r i l 1967) , p . 2 .  TABLE XVI CORPORATION SALES AND PROFITS A F T E R IN C A N A D A , B Y I N D U S T R Y , F I R S T H A L F 1966 AND 1967  TAXES  Sales Profits after taxes First half First half First half First half 1966 1967 1966 1967 (millions of dollars)  Industry Mines, quarries, & oil wells  1,877  1,937  215  188  Manufacturing industries food & beverage rubber textile wood paper & allied printing & publishing primary metal metal fabricating machinery transportation equipment electrical products non-metallic mineral products petroleum & coal products chemical & chemical products other  3,244 311 1,347 1,141 1,479 625 1,297 1,491 1,039 2,610 1,207 523 1,467 1,329 953  3,435 348 1,324 1,277 1,533 714 1,326 1,562 1,162 3,211 1,296 541 1,583 1,371 1,040  81 7 25 34 45 27 71 34 66 111 26 16 47 70 26  60 9 15 28 42 38 63 29 63 115 - 1 5 50 61 30  20,063  21,723  686  607  1,439 Transportation Storage 54 Communication 495 Electric power, gas, & water utilities 435 Wholesale trade 9,286 Retail trade 6,589 * Finance, insurance, & real estate * Service industries * Other non-manufacturing  1,654 74 541 413 9,639 6,946 * * *  69 2 46 33 115 66 197 65 20  • 58 2 42 38 90 53 198 79 7  *  1,514  1,362  Totals  Totals, all industries  Sales f i g u r e s are  *  not a v a i l a b l e .  S o u r c e : D o m i n i o n B u r e a u of S t a t i s t i c s , C o r p o r a t i o n P r o f i t s S e c o n d Q u a r t e r 19 6 7 , O t t a w a , Q u e e n ' s P r i n t e r , iy 6 7 .  36 32 28 24 20 16 Per  12  cent  4 0 4  12  1964  1965  1966  1967  Year FIGURE  10  A N N U A L P E R C E N T A G E C H A N G E IN T H E M A N U F A C T U R I N G INDUSTRY'S C A P I T A L EXPENDITURES (CURRENT D O L L A R S ) , 1964 T O 1 9 6 6 ; G O V E R N M E N T E S T I M A T E D C H A N G E , 1967 S o u r c e : D o m i n i o n B u r e a u of S t a t i s t i c s and D e p a r t m e n t of T r a d e and C o m m e r c e , P r i v a te and P u b l i c Investment in Canada , Ottawa, Queen's P r i n t e r , 1 9 6 5 , 196T~, p . 1 1 .  139 But, other  l i k e l y explanations for these c o n -  tinued dividend i n c r e a s e s dent.  exist.  A lag effect  That dividends lag p r o f i t s ,  is  evi-  exemplified in  C h a p t e r III on p a g e s 13 and 1 4 , i s t r u e b e c a u s e of (1) the u n d e s i r a b l e from  a decreased  market-price reaction arising  d i v i d e n d (see  C h a p t e r I V , pages  55 to 59) c o m b i n e d w i t h (2) s o m e u n c e r t a i n t y  about  the i n d i c a t e d t r e n d i n the c o m p a n y ' s e a r n i n g s . company d i r e c t o r s only after versely,  t e n d to l o w e r the d i v i d e n d a m o u n t  several years to r a i s e  Thus,  of r e d u c e d p r o f i t s a n d ,  the a m o u n t  only after  they a r e  s o n a b l y c e r t a i n t h a t t h e y w i l l not h a v e to r e d u c e Also, crease  sales  conreait.  i n the f i r s t h a l f of 1967 c o n t i n u e d to i n -  despite  l o w e r p r o f i t s (see  c a u s e of t h i s c o n t i n u e d s a l e s  Table X V I ) . Be-  g r o w t h and b e c a u s e  of  the m a n y new f a c i l i t i e s - c r e a t e d i n the p e r i o d 1963 to 1 9 6 6 , m a n y c o m p a n y d i r e c t o r s w e r e of the  opinion  that p r o f i t s , after  would  a p e r i o d of a d j u s t m e n t ,  T h e c h a i r m a n of the l a r g e s t company, for example,  Canadian forest  rise.  products  stated:  T h e c o m p a n y i s p a s s i n g t h r o u g h a p e r i o d where it. i s b u r d e n e d w i t h c o s t s of e x p a n s i o n w i t h o u t , as y e t , e n j o y i n g the e n s u i n g b e n e f i t s . '  J . V . C 1 y n e , M a c M i IT an B l o e d e l L i m i t e d , R e p o r t to the S h a r e h o l d e r s f o r the S i x M o n t h s E n d e d J u n e 3 U , I 9 F 7 , V a n c o u v e r , (TanacTa , Tuly~2To^ 1 9TT7. ~~  140 The outlook for s a l e s in f o r e i g n m a r k e t s s t r e n g t h e n e d by the m u l t i l a t e r a l t a r i f f  was  concessions  a r i s i n g f r o m the s i x t h r o u n d of the G e n e r a l A g r e e m e n t on T a r i f f s and T r a d e  and,  even before  the  round  was c o m p l e t e d ,  by o p t i m i s t i c e x p e c t a t i o n s towards 8 favourable reductions. T o o , most e c o n o m i s t s thought that the A m e r i c a n r e c e s s i o n w h i c h p r e v a i l e d i n the q  first  h a l f of 1967 was  temporary.  A s t u t e m a n a g e m e n t of g o v e r n m e n t monetary  p o l i c y not o n l y k e e p s c o m p a n i e s  competitive maintains  fiscal  with those in other countries  domestic,  tributing reason  aggregate demand.  f o r the  and  in Canada but  also  Another  con-  r e l a t i v e l y high payouts,  there-  f o r e , .was the a p p a r e n t h i g h d e g r e e of c o n f i d e n c e  in-  s p i r e d i n the b u s i n e s s c o m m u n i t y and p r e s s by  the  F i n a n c e M i n i s t e r and h i s s t a b i l i z i n g p o l i c i e s .  For  example,  an e d i t o r i a l i n the M a r c h 2 2 ,  1967  edition  of the V a n c o u v e r Sun s t a t e d : T h e m e n who a t t e m p t to p l a n , g u i d e and i n f l u e n c e the n a t i o n ' s e c o n o m y a r e o n l y as g o o d as i n f o r m a t i o n at t h e i r d i s p o s a l u n l e s s b l e s s e d with g r e a t luck or r e m a r k a b l e i n t u i t i o n .  For example,  see:  Ottawa C i t i z e n ,  J u l y 4,  1967,  p . ' 1. 9' F o r - e x a m p l e , see: G . F l e e t , "Why.many eco- . n o m i s t s see b e t t e r s e c o n d h a l f , " T h e F i n a n c i a l P o s t [To'ronto] , J u l y 2 2 , 1 9 6 7 , p . 22; arTcT " S i z e - u p o i B u s i n e s s i n S e c o n d H a l f , " U . S. News & W o r l d R e p o r t , J u l y 17, 1967, pp. 3 6 - 3 8 . "  141 S u c h a m a n i s F i n a n c e M i n i s t e r S h a r p . He h a s , i t a p p e a r s , so f a r , b e e n s u c c e s s f u l . . . . In M,r.: . S h a r p ' s c a s e we w o u l d l i k e to t h i n k t h a t e x p e r t i s e and i n t u i t i v e j u d g e m e n t w e r e as m u c h a f a c t o r b e h i n d h i s m o v e s to t a m e i n f l a t i o n w i t h o u t precipitating recession. Mr.  S h a r p may have  . . . remarkable vision.  i  In s t a t e m e n t s on b u d g e t p o l i c y at the a p p r o x i m a t e of the q u e s t i o n n a i r e , as f i s c a l p o l i c y ,  the F i n a n c e M i n i s t e r  a h e f t y d e f i c i t (see 11  t a i n an e x p a n s i o n a r y c l i m a t e . t a k e n an a p p r o p r i a t e  time  advocated,  F i g u r e 11) to  E a r l i e r he had  main-  under-  m o n e t a r y p o l i c y and had c r e a t e d a  b u d g e t s u r p l u s to c o m b a t i n f l a t i o n . management  U  Many in Canadian  p r o b a b l y c o n s i d e r e d h i s m o v e s as an i m -  provement in m a i n t a i n i n g l o n g - r u n growth in earnings and s a l e s and the l o w v a r i a b i l i t y of the s a m e . these f a c t o r s  B o t h of  w e r e r a t e d by d i r e c t o r s as v e r y i m p o r -  t a n t i n the d i v i d e n d d e c i s i o n . VI, directors definitely  As concluded in Chapter  do not r a i s e d i v i d e n d s on the  b a s i s of. c u r r e n t p r o f i t ' a l o n e ; t h e y m u s t be s u r e of c o n t i n u e d p r o f i t s . In f a c t ,  n e a r l y o n e - h a l f of the  directors  p o l l e d w e r e of the o p i n i o n t h a t the m o s t i m p o r t a n t s i o n i n d i v i d e n d p o l i c y was w h e t h e r to c h a n g e the A n i n c r e a s e c o u l d not be s a n c t i o n e d i f f u t u r e c o n d i t i o n s and p r o f i t s w e r e e x p e c t e d to  deciamount.  economic  deteriorate.  10 E d i t o r i a l i n the V a n c o u v e r S u n , M a r c h 2 2 , 1967 , p . 4 . p.  17.  The F i n a n c i a l P o s t  [ T o r o n t o ] , June  10,  1967.  600  400  Surplus -.20 0  0 Million Dollars 200  400  Deficit 600  00  1956  58 60 Fiscal Years  6 2 64 66 Ending March 3 1  FIGURE  68  11  G O V E R N M E N T B U D G E T , 19 5 6 T O 1966GOVERNMENT ESTIMATED B U D G E T , 1967 A N D 1968  1967,  Source: p . 17.  The  Financial Post [Toronto! ; — — !  J  , June  10,  1.43  Not a l l m a n a g e m e n t - be a t t r i b u t e d  to one m a n .  confidence, In g e n e r a l ,  however, recent  can  periods  h a v e b e e n c h a r a c t e r i z e d by a g r o w i n g c o n c e r n and s k i l l w i t h i n the g o v e r n m e n t  sector  to s u s t a i n and b a -  l a n c e g r o w t h . T h e S e c o n d A n n u a l R e v i e w of the  Eco-  n o m i c C o u n c i l of C a n a d a c o n t a i n s  com-  the f o l l o w i n g  ment: . . . one of the m o s t p r o m i n e n t f e a t u r e s of p o s t w a r b u s i n e s s f l u c t u a t i o n s has b e e n the s h o r t e r a v e r a g e l e n g t h of c y c l i c a l c o n t r a c t i o n s and the a p p a r e n t l y l o n g e r d u r a t i o n of b u s i n e s s u p s w i n g s . Furthermore ment f i s c a l  (and p a r t i a l l y as a r e s u l t  and m o n e t a r y  l o o k as r e p o r t e d  of g o v e r n -  p o l i c i e s ) , the l o n g - t e r m  by the news m e d i a and o f f i c i a l  had b e e n o p t i m i s t i c . F o r e x a m p l e ,  the  out-  bodies  Economic Coun-  c i l of C a n a d a i n i t s T h i r d A n n u a l R e v i e w s t a t e d : O u r c o n c e r n i s , r a t h e r , w i t h the u n d e r l y i n g t r e n d s and d e v e l o p m e n t s i n the r e c e n t p e r f o r m a n c e i n r e l a t i o n to the e c o n o m y ' s m e d i u m - a n d l o n g e r - t e r m g o a l s and p o t e n t i a l s , and w i t h the p r o g r e s s and p o l i c i e s r e q u i r e d to a t t a i n t h e s e . F r o m t h i s p e r s p e c t i v e , we h a v e c o n c l u d e d t h a t w h i l e i t i s by no m e a n s i n c o n c e i v a b l e that the e c o nomy c o u l d move s l i g h t l y f u r t h e r away f r o m s e v e r a l of i t s g o a l s i n the n e a r - t e r m f u t u r e , the u n d e r l y i n g s i t u a t i o n - - b o t h i n t e r n a l l y and d o m e s t i c a l l y - - s t i l l d i s p l a y s i n d i c a t i o n s of s u f f i c i e n t b a s i c s t r e n g t h and b a l a n c e to m a k e i t u n l i k e l y t h a t the c o u n t r y f a c e s the d a n g e r of a p r o l o n g e d o r m a j o r d e p a r t u r e f r o m the g o a l s . . . . 1 3 :  1 2  Second Annual E c o n o m i c C o u n c i l of C a n a d a , R e v i e w , p. 147. 13 E c o n o m i c C o u n c i l of C a n a d a , T h i r d A n n u a l R e v i e w , p. 229.  144 The  M a y 1967 i s s u e of I n d u s t r i a 1 C a n a d a , p u b l i s h e d by  The  Canadian Manufacturers ' Association,  l o w i n g to s a y a b o u t C a n a d a ' s  had the  fol-  future:  A p o s s i b l e d o u b l i n g of the C a n a d i a n e c o n o m y h a s b e e n p r e d i c t e d o v e r the n e x t 15 y e a r s , g i v e n s t a b l e c o n d i t i o n s at h o m e and a b r o a d . T h e p r e d i c t i o n i s b a s e d on C a n a d a ' s wealth of b o t h h u m a n and n a t u r a l r e s o u r c e s . . . . E x a m i n a t i o n of the a b o v e f a c t o r s  h a v e h e l p e d to  e x p l a i n why m i d y e a r 1967 d i v i d e n d s w e r e at t h e i r ticular  l e v e l of i n c r e a s e .  Indeed,  this brief  g a t i o n of the d i v i d e n d d e c i s i o n w i t h i n the  par-'  investi-  aggregate  e c o n o m i c s e t t i n g has s u p p o r t e d and i s i n a c c o r d w i t h the r e s u l t s of the  14  questionnaire.  " I n d u s t r y '67 C e n t e n n i a l P e r s p e c t i v e , " I n d u s t r i a l C a n a d a , v o l . 68 ( M a y 1967), p . 110.  C HAPTER  VIII  CONCLUSIONS Testing hypotheses b e e n the m a j o r  area  of d i v i d e n d b e h a v i o u r  of c o n c e n t r a t i o n  in this  has  thesis.  T h i s p a r t i c u l a r a p p r o a c h was b a s e d on the b e l i e f  that  m o r e a d e q u a t e k n o w l e d g e of the d e c i s i o n p r o c e s s  is a  prerequisite Similarly,  to p r e d i c t i o n , p l a n n i n g , and o p t i m i z i n g .  t h e o r y and i n v e s t o r s '  that c a n n o t be  reactions  are-areas  ignored.  S o m e of the m o r e s p e c i f i c c o n c l u s i o n s 1. T h e d i v i d e n d a r e a tance:  to the 2.  Patterns  different for  shareholder, are  has f a r  reaching impor-  the f i r m ,  and the  v a r i a t i o n in payout over time a r e :  of i n v e s t m e n t  economy.  i n d i c a t i v e of b o t h c h a n g i n g and  c o n d i t i o n s . S o m e of the r e a s o n s  t u d e s of c o n s u m e r ,  are:  investor,  opportunities;,  accounting  changing a t t i -  and m a n a g e m e n t ; company d i r e c t o r s '  s e r v a t i v e a p p r o a c h ; need f o r w o r k i n g c a p i t a l ; i n the m e t h o d of c a l c u l a t i n g , c a p i t a l c o s t and i n t e r e s t  textile,  companies  are  higher at-  industrial organization  Of the C a n a d i a n c o m p a n i e s  merchandising, non-ferrous  cal industries  changes  than those i n C a n a d a i s  t r i b u t e d to the m o r e a d v a n c e d i n the U n i t e d S t a t e s .  con-  allowances;  r a t e s : . That A m e r i c a n payouts  and h a v e i n c r e a s e d f a s t e r  lack  had the l o w e s t p a y o u t ,  and p i p e l i n e f i r m s had the  metal,  studied,  and c h e m i -  whereas highest.  trust  146 3. The pure e a r n i n g s  h y p o t h e s i s has b e e n  re-  f u t e d i n t h e o r y , and p r a c t i c e . 4. T r a d i t i o n a l t h e o r y on c a p i t a l s t r u c t u r e c o r r e c t because  of i m p e r f e c t c a p i t a l m a r k e t s ;  is  hence  an o p t i m u m p a y o u t r a t i o e x i s t s i n t h e o r y . 5. B o t h the t r a d i t i o n a l t h e o r y on c a p i t a l s t r u c t u r e and the m o d e r n v a l u a t i o n f o r m u l a e h a v e the  same  i m p l i c a t i o n for optimum dividend payout; in p r a c t i c e , because  of i n f o r m a t i o n a l c o n t e n t s  tionality,  and i n v e s t o r  irra-  a c l e a r - c u t r u l e c a n n o t be f o r m u l a t e d .  6. I n f o r m a t i o n a l c o n t e n t s l i n k between a change  are important  as a  i n d i v i d e n d s and a c h a n g e i n  s h a r e p r i c e ; the l e n g t h of t i m e f o l l o w i n g a d i v i d e n d c h a n g e i n d i c a t e s the s t r e n g t h  of t h i s l i n k a g e .  7. A n i n v e s t i g a t o r u s i n g p a i r e d s t o c k s  should  t a k e s t e p s to c a r e f u l l y and c l o s e l y m a t c h the  stocks  so t h a t the e f f e c t  of d i f f e r e n c e s  comparative measures  is  more rational in  and d i v i d e n d s a r e not as  to t h e m i n g r o w t h s i t u a t i o n s English studies  other  minimized.  8. C a n a d i a n i n v e s t o r s a r e their purchases,  i n g r o w t h and  important  as c e r t a i n A m e r i c a n and  have i n d i c a t e d f o r t h e i r  respective  economies . 9. In g e n e r a l ,  i n v e s t o r s a d h e r i n g to low p a y o u t ,  g r o w t h s i t u a t i o n s w e r e b e t t e r off  financially.  • 147  :  1 0 . B o t h (a) the e x t e n t  of g r o w t h and (b)  n a t u r e and t y p e of the i n d u s t r y j a r e v e r y 1  factors  affect i n g t h e  payout  :  the  important  r e t u r n to s h a r e h o l d e r s  of l o w  companies. 11. - C e r t a i n growth f i r m s m a y i n c r e a s e  the  mar-  ket p r i c e of t h e i r s t o c k i n the l o n g - r u n by l o w e r i n g their dividend. 12. Q u e s t i o n n a i r e r e s u l t s fit,  (b) p r e s e n t  ned i n v e s t m e n t  s h o w t h a t (a) net  and a n t i c i p a t e d n e e d f o r c a s h , projects,  are  (c) p l a n -  (d) p a s t d i v i d e n d s , and  e x p e c t e d g r o w t h and v a r i a b i l i t y i n e a r n i n g s  and  c o n s i d e r e d the m o s t i m p o r t a n t v a r i a b l e s  pro-  (e) sales  involved  i n the d i v i d e n d d e c i s i o n . T h e f o l l o w i n g w e r e r a t e d i m portant:  (f) f u t u r e  financing plans,  (g) c a p i t a l  structure,  (h) r a t e of r e t u r n on c a p i t a l , a n d , ( i ) c o s t of c a p i t a l . The f o l l o w i n g ,  o f . s o m e i m p o r t a n c e : (j) f r e q u e n c y of  dividend changes, effect  (k) a t t i t u d e s  of s h a r e h o l d e r s ,  (1)  on p r i c e , (m) u s e of s t o c k s p l i t s and d i v i d e n d s ,  and (n) i n t e r n a l r i s k s . C o m p e t i t o r s ' p a y o u t r a t i o and (p) e x i s t e n c e  of c o n t r o l g r o u p s ,  least  (o)  important.  1 3 . M o r e t h a n o n e - h a l f of the f i r m s c l a i m e d a targe.t p a y o u t r a t i o ,  i n d i c a t i n g t h a t the d i v i d e n d d e c i -  s i o n i s o f t e n the a c t i v e p o l i c y v a r i a b l e . half  one-  c o n s i d e r e d the p r i m a r y d i v i d e n d d e c i s i o n to be  whether rated  L e s s than  to c h a n g e the a m o u n t p r e s e n t l y p a i d . D i r e c t o r s  c o n t i n u i t y as the m o s t i m p o r t a n t f e a t u r e , of a  sound d i v i d e n d p o l i c y , inthatorder.  w i t h s t a b i l i t y and s i z e  following  148 14. A d d i t i o n a l c o m m e n t s  from respondents i n -  d i c a t e d the f o l i o w i n g : a.  There  difference minants  exists  a s i g n i f i c a n t i n t e r - i n du s t r y  i n the a t t i t u d e t o w a r d s  of the  the v a r i o u s  decision.  b. A l t h o u g h many v a r i a b l e s are w h e n the d e c i s i o n i s b e i n g m a d e , specifically  deter-  mentioned,  considered  they are  formulated,  or  seldom  ranked.  c . I n t e r n a l m a n a g e m e n t o w n e r s h i p s h o u l d be negated in c o n s i d e r i n g dividend a c t i o n . d . I n f o r m a t i o n a l i m p a c t of d i v i d e n d s i s n i z e d by e. i s not  directors. F i n a n c i a l theory  on d i v i d e n d d e c i s i o n m a k i n g  acknowledged. f.  Company objectives  are-related  and l o n g - r a n g e  to the d i v i d e n d d e c i s i o n  influence  planning  process.  g . C h a n g i n g , c o m p a n y and e c o n o m i c  conditions  evaluation.  15. S i n c e i n t e r - i n d u s t r y c o n c l u d e d to be d i f f e r e n t , rate must i n c o r p o r a t e i n the  recog-  dividend behaviour  a d i v i d e n d m o d e l to be  t h o s e e l e m e n t s that a r e  d e c i s i o n and t h a t a r e  p e c u l i a r to the  16. R e g r e s s i o n a n a l y s e s  was accu-  inherent  industry.  have shown that  profits  and s i z e are. c o n s i s t e n t l y and h i g h l y s i g n i f i c a n t ; l o n g term  debt, future  prospects,  and d e p r e c i a t i o n  had  149  i r r e g u l a r influence; investment ables  and c a s h - n e e d  unexpectedly showed l i t t l e r e l a t i o n s h i p  d i v i d e n d s ; d e g r e e of l i q u i d i t y and c l e a r l y s h o w e d no  vari-. with  conservatism  relationship.  1 7 . P r o f i t s w e r e s h o w n to h a v e g r e a t e r i n f l u e n c e t h a n c a s h f l o w s on the d i v i d e n d s d e c i s i o n . 18. 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News & 3 6- 3 8 . ~  S m i t h , D . C . " C o r p o r a t e S a v i n g B e h a v i o u r . " The C a n a d i a n J o u r n a l of E c o n o m i c s and P o 1 i t i c a 1. S c i e n c e , v o l . X X I X ( A u g u s t 1 9 6 3 ) , . ppT~2 9 7 - 3 10 . ' S o l o m o n , E . " L e v e r a g e and the C o s t of C a p i t a l , " T h e J o u r n a l of F i n a n c e , v o l . X V I I I ( M a y 1 9 6 3 ) , p p . 273-2Yy.  155 T a r s h i s , L . " C o m m e n t . " A m e r. i c a n E c o n o m i c Re v i e w , P a p e r s and P r o c e e d i n g s , v o l . X L V 1 ( M a y 1 9 5 6 ) , p. 114. T h o m p s o n , G . C . and W a l s h , F . J . J r . . " C o m p a n i e s ' S t r e s s Dividend C o n s i s t e n c y . " Management R e c o r d , N a t i o n a l I n d u s t r i a l Conference "Board , inc . , v o l . X X V ( J a n u a r y 1963) , p p . 3 0 - 3 6 . W a l t e r , J a m e s E . " D i v i d e n d P o l i c i e s and C o m m o n S t o c k P r i c e s . / " T h e J o u r n a l of F i n a n c e , v o l . X I ( M a r c h 1956),  o p . " B - T T :  W a l t e r ' , J a m e s E.. " D i v i d e n d P o l i c y : I t s I n f l u e n c e on the V a l u e of the E n t e r p r i s e . " T h e J o u r n a l of F i n a n c e , v o l . X V I I I ( M a y 1963), pp . ~~2~8~0 - 2 9 1 . W e s t o n ' , J . . F . " A T e s t of C o s t C a p i t a l P r o p o s i t i o n s , - " S o u t h e r n E c o n o m i c J o u r n a l , v o l . 13 ( O c t o b e r 1963 ), PP. i o 5 - i n n : W e s t o n , J . F . " R e v i e w . " T h e J o u r n a l of F i n a n c e , v o l . X V I I I ( S e p t e m b e r 19 63T7~pp. 5 7 9- 5"8"l. :  W e s t o n , J . F . " T h e M a n a g e m e n t of C o r p o r a t e C a p i t a l : A R e v i e w A r t i c l e . " T h e J o u r n a l of B u s i n e s s , v o l . X X X I V - ( A p r i l 1961),"pp. 129- 1397 — " W i p p e r n , R . F . " F i n a n c i a l S t r u c t u r e and the V a l u e of the F i r m . " T h e J o u r n a l of F i n a n c e , v o l . . X X I ( D e c e m b e r 19 6 6T7~"P P . 6 15 - 6~3~3.': ~ D.  NEWSPAPERS  B u r r e l , O . K . " D i v i d e n d s v e r s u s R e t a i n e d . E a r n i n g s as a M a r k e t F o r c e . " T h e C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , v o l . 176~~C&ugust 2 1 , 19 5'ZTT '. B u r r e l , O . K . . " R e l a t i v e V a l u e of E a r n i n g s : R e t a i n e d and D i s t r i b u t e d . " T h e C o m m e r c i a l and F i n a n c i a 1 C h r o - . n i c l e , v o l . 18 6~U u 1 y I B , 195 7 ) . The F i n a n c i a l Post  [Toronto"]  . June 1 0 , 1967.  F l e e t , G . " W h y m a n y e c o n o m i s t s see b e t t e r s e c o n d h a l f . " The F i n a n c i a l P o s t [Toronto] , J u l y 22, Ottawa.Citizen.  J u l y 4,  1967  1967.  S o g a n i c h , J . " P r i c e s and D i v i d e n d s : s o m e a n o m a l i e s s h o w . " T h e F i n a n c i a l P o s t , A p r i l 1 , 19 6 7 . The V a n c o u v e r Sun. M a r c h 22, E . UNPUBLISHED Bicksler, J . Selected c r i p five Stanford  196 7. MATERIAL  E . E m p i r i c a l T e s t s o f C o m p a t l b i l i t y of E q u i t y Share" P r i c e E"q u a t i o n s w i t h a LTe s D i v i d e n d M o 5 e l . . M e rfTo P a r k , C a l i f o r n i a , Re s e a r c h Ins t i t u t e , u n p u b l i s h e d , 1 9 6 6 . F. . MISCELLANEOUS  C 1 yne , J . V .. M a c M i l l a n B i o e d e 1 L i m i t e d , R e p o r t to the S h a r e h o l d e r s f o r ~ t h e S i x . M o n t h i E n d e d J u n e TP", 19 6 7~ V a n c o u v e r , ~ C " a n a l a , J u l y 2 6 , 1 9 6 T : The F i n a n c i a l P o s t C o r p o r a t i o n S e r v i c e . F i n a n c i a l Summary Cards . Toronto, Mac Lean-Hunter Publ i s h i n g Company L i m i t e d , 1966. T h e F i n a n e i a l P o s t S u r v e y - of In.du s t r i a I s .. A S u r v e y of C a n a d i a n . I n d u s t r i a l C o m p a n i e s P r e p a r e d by the . E d i t o r s of t h e . F i n a n c i a l P o s t . T o r o n t o , M a c - L e a n Hun t e r P u b l i s h i n g C o m p a n y L i m i t e d , 1966. N i e l s o n , S. M a r k e t V a l u e a n d . F i n a n c i a l S t r u c t u r e i n the R a i l r o a d . . I n d u s t r y . . T h e T r a v e l e r s I n s u r a n c e C o . , O c c a s i o n a l P a p e r N o . 4, M a r c h , 1961.  APPENDIX A D I V I D E N D T R E N D S IN C A N A D A AND IN T H E U N I T E D S T A T E S  TABLE  A. I  PERCENTAGE OF C O R P O R A T I O N P R O F I T S IN C A N A D A PAID OUT IN DIVIDENDS TO C A N A D I A N P E R S O N S A N D T O NO N - RE.S ID E N T S ( d o l l a r amounts in m i l l i o n s )  Year  1926 1927 1928 1929 1930  Corporation profits after taxes  $  386 436 503 506 . 281 _ "  1931 1932 1933 1934 1935 1936 1937 1938 1939 1940  . 130  1941 1942 1943 1944 1945 1946 1947 1948 1949 1950  609 676 641 636 645 820 1,112 1,277 1,161 1,539  —  134 243 292 392 497 415 583 522  Dividends paid to: Canadian nonpersons residents  $ 93 95 106 112 99'  $  95 106 . 115 • 158 . 177  Total  Proportion of after-tax profits to Canadian persons and non-residents  $ 188 201 221 . 270 276  48.7% 46.lv 43: 9 . 53.4 98.2  97 26 69 • • 85 84 82 . • • 103 ' 121 125 160  150 130 98 . 104 ' 120 ' 161 166 175 177 182  247 156 167 • 189 204 243 269 296 302 342  . 150 129 142 123 119 115 219 216 234 358  168 170 156 153 138 205 248 249 317 404  318 299 298 276 257 320 467 465 551 762  190.0 .124.6 . 77.8 69.9 62.0 54.1 71.3 51.8 65.5 52.2 44.2  46'. 5 43,4  39.8 39.0 42.0 36.4 47.4 49.5  Proportion of dividends to non-residents  50.5% 52.0 52.0 58.5 64.1 60.7 83.3 58.7 55.0 58.8 66.2 • 61.7 59.1 58.6 53.2 52.8 56.9 52.3 55.4 53.7 64.1 53.1 53.5 57.5 53.0  •  TABLE  A.I  Year  Corporation profits after taxes  Dividends paid to: Canadian nonpersons residents  1951 1952 1953 1954 1955 1956 1957 1958 1959" 1960  $  $  1961 1962 1963 1964 1965 1966  1,409 T,314 1,391 1,208 1,693 1,932 1,719 1,760 1,923 . 1,794. 1,815 2,109 2,316 2,823 • 3,035 2,997  .  350 335 317 284 . 307 330 ' 354 376 393 459 432 544 637 677 796 907  (continued)  Total.  $ 370 $ 720 334 669 317 634 327 61T 395 702 437 767 475 829 470 846 501 • 894 458 917 586 584 614 713 751 816  1 1 1 1 1 1  ,018 ,128 ,251 , 39®? ,547 ,723  Proportion of after-tax profits to Canadian persons and non-residents 51.1%50.9 45.6 '50.6 41.5 39.7 . 48.2 48.0 46.5 51.1 56.1 53.6 54.0 49.3 51:0 57.6  Proportion of dividends to non-residents  51.4% 50.0 50.0 53.5 56.2 57.0 57.3 55.5 56.0 49.9 57.6 51.7 49.0 51.3 48.5 47.4  S o u r c e : D o m i n i o n B u r e a u of S t a t i s t i c s , N a t i o n a l A c c o u n t s , I n c o m e a n d . E x p e n d i tu r e O t t a w a u e en ' s P r i n t e r 1 9 2 6 - 1956 ,. 19 6 2 , TUB 5 , 1 9 6 6 T~able 5 0 . 1  TABLE  A.II  UNITED STATES CORPORATE PROFITS AND DIVIDENDS, . 1 9 2 9 - 1964 ( d o l l a r a m o u n t s i n b i l l i o n s )  Year.  1929 1930 193 1 1932 193 3 1934 1935 1936 1937 1938 1939 1940 19 41 • 1942 1943 1944 1945 1946 1947 1948 1949 1950 195 1 1952 1953 1954 1955 1956 1957 • 1958 1959 1960 1961 1962 1963 1964  Corporate profits a f t e r tax  $  •  8 3 2 5 - 1' 3 - 3 4 - 0 4 1 0 2 2 4. 3 4 7 2 ^5 5 0 6 5 ' 9 4• 9. 5 •10 . 5 10 . 4 8 . .3 "13 . 4 18 . 2 - 20. 5 16 . 0 . 22 . 8 19 . 7 17 . 2 18 . 1 16'. 8 23 . 0 23 . 5 22 . 3 18 . 8 24 . 5. 22 . 0 21 . 9 25 . 0 26. 7 3 1. 6  Dividends  $  : "  5. 8 5. 5 4. 1 2. 6 2. 1 2. 6 2. 9 4. 5 4. 7 3. 2 3. 8 4. 0 4. 5 4. 3 4. 5 4. 7 4. 7 5. 8 6. 5 7. 2 7. 5 9. 2 9.0 9. 0 9. 2 9. 8 11 . 2 12 . 1 12. 6 12. 4 13 . 7 14 . 5 21. 9 25 . 0 26 . 7 3 1. 6  Payout percentage  1  '  7 0% 220 0 0 0 260 132 105 100 13 9 76 62 44 45 43 45 57 43 36 35 47 40 46 52 51 58 49 51 56 66 56 66 69 66 67 63  S o u r c e : . E c o n o m i c R e p o r t of the P r e s i d e n t , W a s h i n g t o n , D . C . , U . .S . G o v e n m e ' n t P r i n t i n g O f f i c e , 1965,p.266.  •APPENDIX B H I S T O G R A M SHOWING P A Y O U T RATIOS O F - 190 C A N A D I A N F I R M S , 1961 T O 1965  S o u r c e : The F i n a n c i a l Post C o r p o r a t i o n S'ervice, F i n a n c i a l Summary Cards , Toronto,' Mac L e a n - H u n t e r P u b l i s h i n g C o m p a n y , 1966.  1961 P a y o u t  Ratio  §1 W e i g h t e d A v e r a g e 1 P a y o u t R a t i o , 19611965 P a y o u t  Ratio  Numbe r of Companies  11-20  V;.3 r-'40! 51-60 71-80 91-100 over 100 ->"Payout C a t e g o r y i n P e r 'cent :  FIGURE  B .1  H I S T O G R A M S H O W I N G P A Y O U T R A T I O S O F 190 C A N A D I A N C O M P A N I E S , 1961 TO 1965  APPE'NDIX C HISTOGRAMS SHOWING P A Y O U T RATIOS BY INDUSTRY, 1961 T O 1965  S o u r c e : The F i n a n c i a l . Post C o r p o r a t i o n Service , Financ ia 1 Summary Cards , Toronto, M a c L e a n - H u n t e r - P u b l i s h i n g C o m p a n y , 1966.  I 1961 Payout Ratio Average 1Weighted Payout Ratio, 1961-1965 I 1965 Payout Ratio  4 Number of Companies  Sample size = 11  31-40" 51-60 ' 71-80' 91-100 Payout Category in Per cent  11-20  FIGURE  over 100  C.1  D I S T R I B U T I O N OF RATIOS IN T H E B E V E R A G E INDUSTRY  65Number of Companies  43-  Sample size  z  12  2-  1-  1  11-20  1 Ift II  31-40 ' 51-60' 71-80 91V100 Payout Category in Per cent FIGURE  over 100  C.2  D I S T R I B U T I O N OF RATIOS IN T H E CHEMICAL INDUSTRY  1961 Payout Ratio U Weighted Average I Payout Ratio, 1961-1965 1965 Payout Ratio Numb e r of Sample  C ompanies  size  28  71'.-80 ' 91-100 over 100 Payout Category in Per cent F I G U R E C . 3' D I S T R I B U T I O N OF R A T I O S IN T H E FO'^D INDUSTRY 6 _ 11-20  5_ Number of • Companies  4 ^ S a m p l e s i z e = 17  2 1 -  31-40 " 5 1-60 ' 71-80 91-100 over 100 Payout Category in Per cent FIGURE C .4 D I S T R I B U T I O N OF R A T I O S IN T H E F O R E S T PRODUCTS INDUSTRY 11-20  |  1961 Payout Ratio -  pl Weighted Average El, Payout Ratio, 1961-1965 Nu.m b e r  1965 Payout Ratio  3 -I  of C ompanies  1 -  11-20  31-4.0 ' 51-60 71-80 91-100 Payout Category in Per cent  over 100  FIGURE C .5 D I S T R I B U T I O N OF RATIOS IN T H E GAS AND OIL P I P E L I N E I N D U S T R Y  Payout Category in Per cent FIGURE  C.6  D I S T R I B U T I O N OF RATIOS IN T H E MERCHANDISING INDUSTRY  11-20 31-40 • 51-60 . 71-80 Payout Category in Per cent FIGURE  over 100  C .7  D I S T R I B U T I O N ' OF - R A T I O S IN T H E P U B L I C UTILITY INDUSTRY  p i  11-20  i  i  : i  i  ~  i  31-40 51-60 71-80 Payout Category in Per cent FIGURE  i—  over 100  C. 8  D I S T R I B U T I O N O F R A T I O S IN T H E NON-FERROUS M E T A L INDUSTRY  J 1961 Payout Ratio 5 -  If] Weighted Average | Payout Ratio, 1961-1965  4  .;• 1965 Payout Ratio  Numb e r of  3 S a m p l e s i z e = 16  Companies  ^ 1 11-20  31-40 '  51-60'  71-80'  91-100" over 100  Payout Category in Per cent FIGURE C . 9  v  D I S T R I B U T I O N OF R A T I O S IN T H E T E X T I L E INDUSTRY 6  A  5 Number 4 Sample  of  size  16  3 Companies  1 1  11-20  i  31-40 51-60- 71-80 91-100T over 100 Payout Category in Per cent FIGURE  C . 10  D I S T R I B U T I O N OF R A T I O S IN T H E TRUST C O M P A N Y INDUSTRY  169  APPENDIX D PAYOUT RATIOS FOR D I F F E R E N T SIZE C A N A D I A N F I R M S , 195 1- 1 962  Year  Assets 100,000,000 25,000,000 10,000,000 5,000,000 1,000,000 500,000 250,000 100,000 under  L e gend (dollars)  Svmbo 1  and over - 100,000,000 - 25,000,000 - .10,000,000 5,000,000 1,000,000 500,000 250,000 100,000  FIGURE  D. 1  P E R C E N T A G E PAYOUT RATIOSOF A L L CANADIAN PUBLIC FIRMS, CLASSIFIED BY SIZE (ASSETS), 1951 T O 1962 S o u r c e : C . C . P o t t e r , F i n a n c e and B u s i n e s s A d m i n i s t r a t i o n i n C a n a d a , S c a r b o r o u g ET" O n t . , P r e n t i c e n a i l of C a n a d a LTTm i t e d , 1 9 6 6 , p p . 3 7 4 - 3 7 8  APPENDIX PAIRED  E  COMPANIES  TABLE  E.I  72 P A I R S O F C O M P A N I E S  High  Payout  Maple Leaf Mills Ltd. General Bakeries Ltd. Laura Secord Candy Shops Ltd. Canada & Dominion Sugar Co. British Columbia Sugar Refinery Ltd. Canadian Canners Ltd. Walter M . Lowney Co. Ltd. Dominion Dairies Ltd. Silverwood Dairies Ltd. Stafford Foods Ltd. Salada Foods Ltd. Maritime Telegraph & Telephone Co. Ltd. Nova Scotia Light & Power Co. Ltd. MacLaren Quebec Power Co. International Utilities Corp. Canadian Western Natural Gas Co. Ltd. Greater Winnipeg Gas Co. Bell Telephone Co. of Canada United Towns Electric Co. Ltd. Canadian Utilities Ltd. Union Gas Co. of Canada Ltd. Price Co. Ltd. Great Lakes Paper Co. Ltd. MacMillan Bloedel" Ltd. St. Lawrence Corp. Ltd. Beaver Lumber Ltd. Abitibi Ltd. Scott Paper Ltd. Consolidated Paper Corp. Alcan Aluminum Ltd. The Niagara Wire Weaving Co. Ltd. Cominco Ltd. Hahn Brass Ltd. Traders Group Ltd. National Trust Co. The Canada Trust Co. Victoria & Grey Trust Co. Credit Foncier Franco-Canadien Ltd. The Sterling Trust Corp.  Low  Payout  George Weston Ltd. Canada Bread Co. Ltd. Bowes Co. Ltd. Canada Packers Ltd. Atlantic Sugar Refineries Co. Bick's of Canada Ltd. Fanny Farmer Candy Shop Inc. Canadian Food Products Ltd. The Canadian Salt Co. Ltd. Monarch Fine Foods Ltd. Burns Foods Ltd. Quebec Telephone Ltd. Canadian International Power Co. Ltd. Great Lakes Power Corp. Ltd. Northland Central Gas Co. Ltd. Newfoundland Light & Power Co. Ltd. Lakeland Natural Gas Ltd. British Columbia Telephone Co. East Kootney Power Co. Ltd. Maritime Electric Co. Ltd. Calgary Power Ltd. Anglo-Canadian Pulp & Paper Mills Ltd. Hinde & Dauch Ltd. British Columbia Forest Products Ltd. Rolland Paper Ltd. Revelstoke Building Materials Ltd. Donohue Brothers Ltd. Bathurst Paper Ltd. Columbia Cellulose Ltd. Canadian British Aluminum Co. Ltd. Phillips Cables Ltd. Noranda Mines Ltd. Industrial Wire & Cable Co. Ltd. Crown Trust Co. Guaranty Trust Co. of Canada Montreal Trust Co. Union Acceptance Corp. Ltd. The Ontario Loan & Debenture Co. Eastern & Chartered Trust Co.  T ABLE  High  E.I  Payout  Canada Permanent Mort. Corp. Hudson's Bay Co. G. Tamblyn Ltd. Zeller's Ltd. Lob law Inc. Dominion Stores Ltd. Shop & Save (1957) Ltd. Reitman's (Canada) Ltd. Transmountain O i l Pipeline Co. Trans-Canada Pipelines Ltd. The Alberta Gas Trunkline Co. Ltd. Interprovincial Pipeline Co. Pacific Gas Transmission Co. Texaco Ltd. British American Oil Co. Ltd. Dominion Textile Co. Ltd. The Hamilton Cotton Co. Ltd. Dominion Corset Co. Ltd. .Harding Carpets Ltd. Biltmore Hats Ltd. Scythes & Co. Ltd. The Steel Co. of Canada Ltd. Dominion Steel & Coal Corp. Ltd. Dominion Bridge Co. Ltd. Domtar Ltd. . Canadian Industries Ltd. Sherwin-Williams Co. of Canada Canadian Crushed & Cut Stone Ltd. Ocean Cement & Supplies Ltd. Canadian General Electric Co. Hiram Walker-Gooderham & Worts Ltd. Crown Cork & Seal Co. Ltd. Chateau-Gai Wines Ltd.  (continued)  Low  Payout  Laurentide Financial Corp. Ltd. Simpsons-Sears Ltd. Woodward's Stores Ltd. Metropolitan Stores Ltd. National Grocers Co. Ltd. Lob law Co. Ltd. Steinberg's Ltd. Kelly Douglas Ltd. Trans-Prairie Pipe Lines Ltd. Canadian Hydrocarbons Ltd. Supertest Petroleum Corp. Western Pacific Products & Crude Oil Pipelines Ltd. Alberta Gas Co. Royalite Oil Co. Ltd. Shell Canada Ltd. The Wabasso Co. Ltd. Bruck Mills Ltd. Exquisite Form Brassiere (Canada) Ltd Consolidated Textile Mills Ltd. Harvey Woods Ltd. Dominion Fabrics Ltd. Dominion Foundries & Steel Ltd. Canadian Vickers Ltd. Standard Structural Steel Ltd. Union Carbide Canada Ltd. Chemcell Ltd. International Paints (Canada) Ltd. Lake Ontario Cement Co. Ltd. St. Lawrence Cement Co. Canadian Westinghouse Co. Ltd. Distillers Corp.-Seagrams Ltd. Crush International Ltd. T. C. Brighty & Co. Ltd.  TABLE  E . II  28 P A I R S O F C O M P A N I E S E X H I B I T I N G S U P E R I O R  High'Payout Maple. .-Leaf Mills Ltd. General Bakeries Ltd. Laura Secord Candy Shops Ltd. Walter M . Lowriey Co. Ltd. Canadian Canners Ltd. Dominion Textile Co. Ltd. The Hamilton Cotton Co. Ltd. Harding Carpets Ltd. Trans Mountain Oil Pipeline Co. Trans-Canada Pipelines Ltd. Crown Cork & Seal Co. Ltd. Alcan Aluminum Ltd. Cominco Ltd. The Steel Co. of Canada Ltd. Dominion Bridge Co. Ltd. Canadian Industries Ltd. Canada Crushed & Cut Stone Ltd. Ocean Cement & Supplies Ltd. Canadian General Electric Co. Price Co. Ltd. MacLaren Quebec Power Co. International Utilities Corp. Greater Winnipeg Gas Co. National Trust Co. The Canada Trust Co. Victoria & Grey Trust Co. Zeller's Ltd. Lob law Lac.  Low  GROWTH  Payout  George Weston Ltd. Canada Bread Co. Ltd. Bowes Co. Ltd. Fanny Farmer Candy Shop Lie. Bick's of Canada Ltd. The Wabasso Cotton Co. Ltd. Bruck Mills Ltd. Textile Mills Ltd. Trans-Prairie Pipelines Ltd. Canadian Hydrocarbons Ltd. Crush International Ltd. Canadian British Aluminum Co. Ltd. Noranda Mines Ltd. Dominion Foundries & Steel Ltd. Standard Structural Steel Ltd, Chemcell Ltd. Lake Ontario Cement Co. Ltd. St. Lawrence Cement Co. Canadian Westinghouse Co. Ltd. Anglo-Canadian Pulp & Paper Mills Ltd Great Lakes Power Corp. Ltd. Northern & Central Gas Co. Ltd. Lakeland Natural Gas Ltd. Guaranty Trust Co. Montreal Trust Co. Union Acceptance Corp. Ltd. Metropolitan Stores Ltd. National Grocers Co. Ltd.  TABLE  E . Ill  27 P A I R S O F C O M P A N I E S C L O S E L Y  High  Payout  Maple Leaf Mills Ltd. Walter M . Lowney Co. Ltd. British Columbia Sugar Refinery Ltd. Dominion Dairies Ltd. Salada Foods Ltd. Stafford Foods Ltd. Pacific Gas Transmission Co. The Hamilton Cotton Co. Dominion Corset Co. Ltd. Scythes and Co. Ltd. Biltmore Hats Ltd. Hudson's Bay Co. Zeller's Ltd. Lob law Inc. Dominion Stores Ltd. Cominco Ltd. The Steel Co. of Canada Ltd. Canadian Industries Ltd. Canadian Crushed & Cut Stone Ltd. Canadian General Electric Co. Price Co. Ltd. Maritime Telegraph & Telephone Co. Ltd. Greater Winnipeg Gas Co. Ltd. International Utilities Corp. Canada Union Gas Co. of Canada Ltd. Canadian Utilities Ltd. National Trust Co.  Low  PAIRED  Payout  George Weston Ltd. Fanny Farmer Candy Shop Inc. Atlantic Sugar Refineries Co. Canadian Food Products Ltd. Burns Foods Ltd. Monarch Fine Foods Ltd. Alberta Natural Gas Co. Bruck Mills Ltd. Exquisite Form Brassiere (Canada) Ltd Dominion Fabrics Ltd. Harvey Woods Ltd. Simpsons-Sears Ltd. Metropolitan Stores Ltd. National Grocers Co. Ltd. Lob law Co. Ltd. Noranda Mines Ltd. Dominion Foundries & Steel Ltd. Chemcell Ltd. Lake Ontario Cement Co. Ltd. Canadian Westinghouse Co. Ltd. Anglo-Canadian Pulp & Paper Mills Ltd Quebec Telephone Ltd. Lake and Natural Gas Ltd. Northern and Central Gas Co. Ltd. Calgary Power Ltd. Maritime Electric Co. Ltd. Montreal Trust Co.  TABLE  E . IV  24 P A I R S O F C O M P A N I E S W I T H A R A T I O D I F F E R E N C E O V E R 35 P E R C E N T  High  Payout  Credit Foncier Franco-Canadien Ltd. MacLaren-Quebec Power Co. Greater Winnipeg Gas Co. Canadian Utilities Ltd. Consolidated Paper Corp. Ltd. Beaver Lumber Ltd. Ocean Cement Ltd. Domtar Ltd. Canadian Industries Ltd. A lean Aluminum Ltd. The Niagara Wire Weaving Co. Ltd. Zeller's Ltd. Lob law Lie. Trans Mountain Oil Pipeline Co. Interprovincial Pipeline Co. Dominion Textile Co. Ltd. Cosmos Imperial Mills Ltd. Dominion Corset Co. Ltd. Scythes & Co. Ltd. Belding-Corticelli Ltd. Laura Secord Candy Shops Ltd. Salada Foods Ltd. Canadian Canners Ltd. Chateau-Gai Wines Ltd.  Low  Payout  The Ontario Loan & Debenture Co. Canadian International Power Co. Ltd. Lakeland Natural Gas Ltd. Maritime Electric Co. Ltd. Columbia Cellulose Ltd. Revelstoke Building Materials Ltd. Lake Ontario Cement Co. Union Carbide Canada Ltd. Chemcell Ltd. Canadian British Aluminum Co. Ltd. Phillips Cables Ltd. Metropolitan Stores Ltd. National Grocers Co. Ltd. Trans Prairie Pipelines Ltd. Western Pacific Products & Crude Oil Pipelines Ltd. The Wabasso Cotton Co. Ltd. Harvey Woods Ltd. Exquisite Form Brassiere Canada Ltd. Dominion Fabrics Ltd. Bruck Mills Ltd. Bowes Co. Ltd. Burns Foods Ltd. Bick's of Canada Ltd. T. C. Bright & Co. L t d .  APPENDIX  F  C O P I E S O F (1) T W O L E T T E R S REQUESTING COOPERATION . A N D . (2) A C C O M P A N Y I N G QUESTIONNAIRES  THE  UNIVERSITY  O F BRITISH  VANCOUVER  COLUMBIA  8, C A N A D A  FACULTY OF COMMERCE AND BUSINESS ADMINISTRATION  March 25, 1967  Oear S i r s I am presently working on a t h e s i s e n t i t l e d The Dividend Decision with Emphasis on the Canadian S i t u a t i o n i n order to f u l f i l the requirements f o r the degree o f Master o f Business Administration from the U n i v e r s i t y o f B r i t i s h Columbia. I would appreciate your comments on some o f the f a c t o r s that you consider important i n deciding on the dividend that you pay to the holder o f common shares. For convenience, I have enclosed a questionnaire. The information would be kept c o n f i d e n t i a l ; that i s , the company name would not be mentioned i n the t h e s i s or elsewhere. I have requested t h i s same information from twenty-nine other companies.  this.  I would be g r a t e f u l f o r your help and cooperation on Thank you i n a n t i c i p a t i o n of a favorable response. Yours s i n c e r e l y  C u r t i s J . Copeland Enclosure  DIVIDEND DECI5IQN QUESTIONNAIRE Please r e t u r n t o :  C u r t i s J . Copeland Faculty of Commerce and Business Administration The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada  1.  Factors that you consider most important i n deciding on the company dividend to holders of common shares. Please -rate the f a c t o r s on the l i s t I f other f a c t o r s apply, please s t a t e them. very important 1 2  a.  past dividends  b.  t h i s year's  c.  frequency of dividend changes  d.  expected  growth i n earnings and s a l e s  e.  expected sales  v a r i a b i l i t y i n earnings or  f.  competitors' payout r a t i o  g.  a t t i t u d e s of shareholders  h.  e f f e c t of a change of divided'' on market p r i c e of stock  i.  not  important 5  profit  —  future f i n a n c i n g plans i. equity ii.  debt  j.  planned  k.  capital structure  1.  rate of r e t u r n on c a p i t a l  m.  present and a n t i c i p a t e d need f o r cash  n.  internal risks  o.  use of stock s p l i t s , dividends and extras  p.  some importance 3 4  investment p r o j e c t s  —-  r e l a t i v e s i z e of stock ownership by management or other c o n t r o l groups  q r s 2.  3.  Do you have a target payout r a t i o to aim f o r ?  Yes  No  Please rank the r e l a t i v e importance of the f o l l o w i n g : Rank Size of dividends Continuity of dividends S t a b i l i t y of dividends  4.  5.  Oa you^consider that the primary dividend d e c i s i o n i s : amount of the dividend we are p r e s e n t l y paying? Yes Other comments, i f any:  Do we need to change the No_  THE  UNIVERSITY  O F BRITISH  VANCOUVER  8,  COLUMBIA  CANADA  FACULTY OF  A p r i l 15, 1967  C O M M E R C E A N D BUSINESS ADMINISTRATION  Dear S i r s Several weeks ago I sent a l e t t e r to you requesting your opinion an c e r t a i n f a c t o r s you consider important i n deciding on the dividend you pay to common shareholders. In the event that my o r i g i n a l l e t t e r and questionnaire were not received or have been misplaced I have enclosed another copy o f the questionnaire. The information i s d e s i r e d f o r a t h e s i s e n t i t l e d The Dividend Decision with Emphasis on the Canadian S i t u a t i o n undertaken to f u l f i l l the requirements f o r the degree of Master of Business Administration from the U n i v e r s i t y o f B r i t i s h Columbia. The information would be kept c o n f i d e n t i a l ; that i s , the company name would not be mentioned i n the t h e s i s or elsewhere, I would be g r a t e f u l f o r your help and cooperation. i n a n t i c i p a t i o n o f a favourable response.  Thank you  Yours s i n c e r e l y  C u r t i s J . Copeland Enclosure  DIVIDEND DECISION QUESTIONNAIRE Please return to:  1.  Curtis J. Copeland Faculty of Commerce and Business Administration The University of British Columbia Vancouver 8, Canada  Factors that you consider most important i n deciding on the company dividend to holders of common shares. Please -rate the factors on the l i s t If ether factors apply, please state them. very important 1 2  a.  past dividends  b.  this year's profit  c.  frequency of dividend changes  d.  expected growth i n earnings and sales  e.  expected v a r i a b i l i t y in earnings or sales  f.  competitors' payout ratio  g.  attitudes of shareholders  h.  effect of a change of divider*' on market price of stock  i.  future financing plans i . equity  some importance 3 4  not important 5  1  ii.  debt  j.  planned investment projects  k.  capital structure  1.  rate of return on capital  m.  present and anticipated need for cash  n,  internal risks  o.  use of stock s p l i t s , dividends and extras  p.  relative size of stock ownership by management or other control groups  q,  cu_t of c c p i t c l  r.  s 2.  3.  Do you have a target payout ratio to aim for?  Yes  No  Please rank the relative importance of the following: Rank Size of dividends  ________________________  Continuity of dividends  ___________________________  Stability of dividends 4.  Da you''consider that the primary dividend decision i s : Do we need to change the amount of the dividend we are presently paying? Yes No  5. Other comments, i f any:  APPENDIX FIRMS  USED  G  FOR M O D E L  TESTING  TABLE  G.I  25 F I R M S I N T H E F O R E S T P R O D U C T S  INDUSTRY  Abitibi Paper Co. L t d . Scott P a p e r L t d . Bo w a t e r s M e r s e y P a p e r C o . L t d . Consolidated Paper Corporation Ltd. Price Co. Ltd. A n g l o - C a n a d i a n P u l p and P a p e r M i l l s L t d . Great Lakes Paper Co. L t d . B a r b e r - E l l i s of C a n a d a L t d . St. Lawrence C o r p o r a t i o n L t d . Donohue B r o t h e r s L t d . MacMillan Bloedel Ltd. Dryden Paper Co. L t d . F r a s e r Companies L t d . British Columbia Forest Products Ltd. Bathurst Paper L t d . Canadian Wallpaper Manufacturers L t d . Thompson Paper Box C o . L t d . Hinde & Dauch L t d . Rolland Paper Co. L t d . Globe Envelopes L t d . L i v i n g s t o n Wood M a n u f a c t u r i n g L t d . Crestbrook Timber Ltd. E r i c F l o o r i n g & Wood P r o d u c t s L t d . Columbia Cellulose Co. Ltd. Beaver Lumber Co. L t d .  TABLE  G . II  60 F I R M S I N A L L I N D U S T R I E S  Beverages Hiram Walker Gooderham- Worts L t d . Crush International Ltd. Chemicals Chem c e l l L t d . R e i c h o l d C h e m i c a l s (Canada) L t d . J e f f e r s o n L a k e P e t r o c h e m i c a l s of C a n a d a  Ltd.  Construction Canada Cement C o . L t d . Ocean Cement & Supplies L t d . C a n a d a C r u s h e d and C u t S t o n e L t d . British American Construction & Materials Ltd. Standard Paving & M a t e r i a l s L t d . Revelstoke Building Materials Electrical ~ Canadian Westinghouse Co. L t d . Northern Electric Co. Ltd. CAE Industries Ltd. Foodstuffs Les L a i t e r i e s L e c l e r c Inc. Canada P a c k e r s L t d . Canadian Canners L t d . Ocean F i s h e r i e s L t d . Forest  Products Crestbrook Timber Ltd. Abitibi Paper Co. L t d . B a r b e r - E l l i s of C a n a d a L t d . MacMillan Bloedel Ltd. British Columbia Forest Products  Ltd.  I r o n and S t e e l Aigoma Steel Ltd. Canada V i c k e r s L t d . Athnes I m p e r i a l L t d . Massey Ferguson Ltd. Farano L t d . I n g e r s o l l M a c h i n e and T o o l C o . L t d . Wajax L t d .  TABLE  G.II  (continued)  Merchandising Simpsons-Sears Ltd. R e i t m a n ' s (Canada) L t d . R o c k o w e r of C a n a d a L t d . Shop & S a v e 1957 L t d . Oshawa W h o l e s a l e L t d . Canadian T i r e Corporation L t d . Marshall Wells Ltd. W m . S t a i r s , Son & M o r r o w L t d . Miscellaneous Neon P r o d u c t s Non F e r r o u s M e t a l s Uominco L t d . P h i l l i p s Cables O i l and  of C a n a d a  Ltd.  Ltd.  Pipelines A n g l o - C ana d i a n O i l s L t d . Texaco Canada L t d . Interprovincial Pipeline Co. Trans Canada Pipe L i n e s L t d . A l b e r t a N a t u r a l Gas C o .  P r i n t i n g and P u b l i s h i n g Toronto Star Southam P r e s s Moore Corporation L t d . L a w s o n and J o n e s L t d . Public Utilities New B r u n s w i c k T e l e p h o n e C o . . Mac.laren Power & Paper Co. International Utilities Corporation Inland N a t u r a l Gas C o . Textiles S~c ott L a S a l l e L t d . Consolidated Textile M i l l s Harding Carpets Ltd. Transportation T h e W h i t e P a s s and Y u k o n C o r p o r a t i o n Straits Towing Ltd. Kenting Aviation L t d .  Ltd.  

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