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In search of a residual dividend policy
Author(s) -
Baker H. Kent,
Smith David M.
Publication year - 2005
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2004.10.002
Subject(s) - dividend policy , dividend , dividend payout ratio , residual , dividend yield , free cash flow , sample (material) , earnings , monetary economics , cash flow , economics , business , financial economics , econometrics , finance , mathematics , chemistry , algorithm , chromatography
We survey 309 sample firms exhibiting behavior consistent with a residual dividend policy and their matched counterparts to learn how they set their dividend policies. The findings reveal that the sample firms are more likely than their counterparts to maintain a long‐term dividend payout ratio, use long‐run earnings forecasts in setting the dividend, and be unconcerned about the cost of raising external funds. Yet, firms behaving as though they follow a residual dividend policy generally do not profess to follow the policy. At best, the sample firms follow a “modified” residual policy in which they carefully manage their payout ratio and dividend trend. Although it may not be an explicit goal of such a dividend policy, consistently low free cash flow typically results.