Abstract
Dividend policy is not set de novo each year, but dividends are smoothed from one year to the next, leading to a short-term persistent component. In this paper, we investigate whether there is also long-run persistence in dividend policy, by using a unique sample of firms listed on the Brussels Stock Exchange since 1824. We show that dividend smoothing leads to a long-term persistent component in dividend policy, as we find evidence that the initial dividend policy, as measured in the first calendar year after listing, has a long-lasting effect on future dividend policy. Although this effect persists for many years, it fades away over time. When this happens, a new slowly changing dividend policy emerges.
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Notes
Dewenter and Warther (1998) are a notable exception and look back 3 years in time.
Together with the Amsterdam Stock Exchange and the Paris Stock Exchanged, the Brussels Stock Exchange merged into Euronext in 2001. Six years later, Euronext merged with the NYSE.
Daily average income of a male adult (older than 16) worker was less than 5 BEF in the 1840s (Neirynck 1944).
The rights attached to specific shares are settled in the articles of incorporation. By focusing on one stock for each firm, our results are guaranteed to not be influenced by changes in these dividend rights.
According to Frère (1951) on average 60% of all firms published their balance sheet between 1873 and 1913.
We use Dutch data since Belgium was still a part of the Netherlands before its independence in 1830. Data on Dutch Treasury bills are on an annual basis. We thank Joost Jonker for providing these data.
We use these Dimson betas to control for illiquid firms.
If there are no data for the previous 60 months, we require a minimum period of 24 months.
Note that correlations are calculated for the original values of all variables. As such, we had not yet used the logarithm of size, age, idiosyncratic risk and share price. We report the correlation matrix of the transformed variables in Appendix Table 1.
As a robustness check, we also estimate a logit regression. The results are very similar and are reported in Internet Appendix.
For the decision to pay, we estimated a linear probability model, and for the dividend per share, we focused on nominal amounts. For these variables, the economic significance is thus not reliable. Therefore, we only focus on the economic significance of the yield and the payout ratio of dividends.
We do not include the initial value of idiosyncratic risk since we are not able to calculate this value for the first year of listing. Rather than using the logarithm of size, age, idiosyncratic risk, and share price, we use the absolute value of each variable in the first listed year.
In the subsample of firms for which we collected accounting data, we followed firms for 18 years. Therefore, we no longer include an analysis on dividend payout ratio.
Although we cannot empirically estimate the SOA given the paucity of earnings data for most of our sample period, Leary and Michaely (2011) analyze the evolution of the SOA between 1928 and 2007. The median (mean) SOA lies between 0.18 (0.09) and 0.55 (0.55). The chosen possibilities for SOAs in our simulation are thus in line with the empirical observations of SOAs based on long-term US data.
To further investigate how long the impact of the initial dividend policy last, we divide our firms into different subsamples based on their firm characteristics. We split our sample into two groups (above and below the median), based on different firm characteristics (size, age, share denomination and liquidity), and we investigate in these 8 different subsamples at which pace the impact of the initial dividend policy disappears. Results are reported in Internet appendix.
As the number of observations decreases drastically for firms that are listed more than 40 years, we only define the initial dividend policy at t = 10, 20, 30.
A third smaller break is identified in the mid-1980s. This break in dividend policy was specifically driven by new firms that entered the sample, that had the typical characteristics of nonpayers. As this break is driven by the entering of this new type of firms in the sample, we mainly focus on the impact of World War I and World War II on the persistence in dividend policy.
The Great Depression is another important event between both World Wars. Although Moortgat et al. (2017) did not identify a structural break in dividend policy during the Great Depression, the graphical evolution shows that dividend policy was also heavily affected by this crisis. To test whether the Great Depression destroys the impact of the initial dividend policy for firms that are incorporated just before the Great Depression, we regress a similar model as in Eq. 5, where the World War dummy is replaced by a Great Depression dummy. We do not find any evidence that the impact of the initial dividend policy disappears during the Great Depression. The results are discussed in Internet Appendix.
In an additional analysis, we divide our sample period into IPO cohorts of 20 years, e.g., all IPOs between 1850 and 1869 belong to the same IPO cohort. The first IPO cohort considers all IPOs before 1849; the last IPO cohort considers all IPOs between 1970 and 1999. Although not all results are significant, broadly speaking we do find evidence for the persistence in dividend policy in all time periods. Results are included in Internet Appendix.
We stop in 2000 because otherwise, we would not be able to follow firms for 20 years.
We thank an anonymous referee for pointing this out.
As robustness check, we measure the initial dividend policy also in year T − 10, and in year T − 5, where T is the year of delisting. Even when we come closer to the delisting, we still find evidence for a persistent component in the dividend policy of firms that are likely to delist because of financial difficulties.
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Acknowledgements
We are grateful for the helpful comments of the editor, Claude Diebolt, and two anonymous referees. Further, we thank Emilie Bonheure, Frans Buelens, Harry DeAngelo, Marc De Ceuster, Abe de Jong, Narly Dwarkasing, Dusan Isakov, Virginie Mataigne, Ine Paeleman, John Turner, Kevin Van Mencxel, Gertjan Verdickt, and Patrick Verwijmeren for their insights and comments. We thank Joost Jonker for providing data on the Dutch short-term interest rate and inflation rates for the period from 1824–1838. The paper benefitted from presentation at the Low Countries Financial History Workshop 2019 (Amsterdam), the 2019 Financial Management Association European Conference (Glasgow), the 2019 European Historical Economics Society (Paris), the Corporate Finance Day 2019 (Groningen), the 2023 Belgian Financial Research Forum (Brussels), the online Benelux Corporate Finance Seminar (2023), and seminars at the University of Antwerp and the KU Leuven.
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Moortgat, L., Annaert, J. & Deloof, M. The long-run persistence in dividend policy. Cliometrica (2024). https://doi.org/10.1007/s11698-023-00279-8
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DOI: https://doi.org/10.1007/s11698-023-00279-8