Managerial Objectives and Firm Dividend Policy : A Behavioral Theory and Empirical Evidence

We construct a dynamic model of firm dividend policy based on some basic ingredients of the behavioral theory of the firm, in particular, uncertainty avoidance and sequential decision-making by self-seeking managers. We characterize the optimal dividend policy and show that comparative statics on this policy generate restrictions on the relation of the likelihood of future dividend changes with respect to current real and financial variables such as investments, dividends, and technological parameters that govern the evolution of the economic earnings of the firm, such as the variance and persistence of the systematic shocks on capital productivity. These relations are then empirically tested on NYSE dividend data. The empirical results are supportive of the predictions from the behavioral model. Specifically, current investment, dividend payouts and the return on capital appear to have significant impact on the likelihood of future dividend changes, as do the variance and persistence of capital productivity shocks. In particular, idiosyncratic firm risk is found to have a negative relation to the likelihood of dividend changes. Finally, these variables are shown to impact the likelihood of dividend increases and decreases asymmetrically, a distinction emphasized by the behavioral model