Current Versus Permanent Earnings for Estimating Alternative Dividend Payment Behavioral Model: Theory, Methods and Applications

Cheng-Few Lee (), Hong-Yi Chen (), Alice C. Lee () and Yuhsin Tai ()
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Cheng-Few Lee: Rutgers University
Hong-Yi Chen: Department of Finance, National Chengchi University
Alice C. Lee: Center for PBBEF Research
Yuhsin Tai: Rutgers, The State University of New Jersey

Chapter 70 in Encyclopedia of Finance, 2022, pp 1599-1640 from Springer

Abstract: Abstract The main purposes of this chapter are to: (1) theoretically explain why firms generally allocate permanent earnings and transitory earnings between dividends payments and retained earnings; (2) develop alternative methods for decomposing current earnings into permanent and transitory components; (3) empirically estimate alternative dividend payment behavior models by using two alternative permanent EPS estimates for both individual firms and pooled data; and (4) test Lambrecht and Myer’s (2012) theoretically results related to alternative dividend payment behavior models. We find that the average long-term payout ratio is downward biased and the average estimated intercept is generally upward biased when current instead of permanent EPS are used. We also find that the combined model performs well to deal with both measurement errors and specification errors in describing the dividend payment behavior model.

Keywords: Current earnings; Current EPS; Permanent earnings; Permanent EPS; Dividend behavior models; Specification analysis; Partial adjustment coefficient; Long-term payout ratio (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_70

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DOI: 10.1007/978-3-030-91231-4_70

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