In search of a residual dividend policy

H. Kent Baker and David Smith

Review of Financial Economics, 2006, vol. 15, issue 1, 1-18

Abstract: 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.

Date: 2006
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https://doi.org/10.1016/j.rfe.2004.10.002

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:15:y:2006:i:1:p:1-18

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