Corporate Dividend Policies: Lessons from Private Firms

Abstract

We compare the dividend policies of publicly and privately held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time. Public firms pay relatively higher dividends that tend to be more sensitive to changes in investment opportunities than otherwise similar private firms. Ultimately, ownership structure and incentives play key roles in shaping dividend policies. (JEL G35, G32, G15) Miller and Modigliani (1961) show that dividend policy is irrelevant for firm value when markets are “perfect ” and investment is held constant. However, both empirical evidence (e.g., Allen and Michaely 2003) and survey evidence (Lintner 1956; Brav et al. 2005) suggest that dividend policy is anything but irrelevant to managers and markets. Rather, corporate dividend policies exhibit clear patterns. In particular, dividends are “smoothed ” and not often decreased, and investors react positively to dividend increases and negatively