Chuan-San Wang 1. Research Question Does payout policy affect investment decision ? Do discretionary...
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Transcript of Chuan-San Wang 1. Research Question Does payout policy affect investment decision ? Do discretionary...
Research Question• Does payout policy affect investment
decision ?• Do discretionary accruals differ from
other earnings components in cash payout decisions?
• Does managers’ accounting discretion mitigate the tension between payouts and investment?
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Motivationpayout policy can be relevantCorporate decisions can reveal
earnings qualityAccrual accounting can mitigate
competition for capital resources
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ImportanceDividends can be value-relevant,
DeAngelo and DeAngelo (2006) Several crucial studies are based on
the irrelevance theorem, e.g., Ohlon’s (1995) valuation model
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Contributions• It shows the causality from dividends to
investment • It quantifies the competition for capital
resources• It focuses on the impact of earnings
quality on both dividends and investments• It provides new evidence based on
actual corporate actions5
Literature #1Miller and Modigliani (1961) theoretically
propose that dividend policy is value-irrelevant because it is
made after the investment decisionThe survey evidence from Brav et al. (2005)
indicates the opposite: dividend choices are made simultaneously with
(or perhaps a bit sooner than) investment decisions
H1: The magnitude of cash dividends is simultaneously determined with that of capital expenditures.
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Literature #2Earnings can explain the propensity to pay
dividends (Fama and French, 2001)The three earnings components are similar in
explaining dummy for dividend increase (Subramanyam, 1996)
Accrual accounting provides additional informationH2: discretionary accruals increase dividend
payouts by mitigating financial constraints.H3: the marginal propensity to pay dividends
for discretionary accruals differs from that of other earnings components
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Research design #1Cash payout equation
2-stage regressionsSimultaneity between Y and X
variablesdiagnostic statistics
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The 2 IVsSargan test for the over-identifying restrictions
To show IVs are exogenous to the error term of payout equation
One-year lagged depreciation expense, and capital expenditures
Jackson et al. (2009)perceived utility, earnings consequences
Investment projects need subsequent maintenance and evaluation at multiple stages (Seybert, 2010)
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Control Variable for Dividendslife-cycle theory
Fama and French (2001), DeAngelo et al. (2006), Chay and Suh (2009)
senior firms pay more dividends firm size, MVE firm age, Tage investment opportunities, MtB retained earnings, RE/TE cash flow uncertainty, SRVOL
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More Control Variablesdividends persistency and financial
slackLintner (1956), Brav et al. (2005)
Past dividends
financial leverage
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Other Control Variablefirm performance.
Fama and French (2001)value-weighted, market-adjusted buy-and-hold annual stock return, BHARt
operating cash flows, OCFtreturn on assets, ROAt
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Baseline resultsIVs for capital expenditures are valid
and stronginvestment magnitude is determined
simultaneously with cash dividendsinvestments have a significantly
negative effect on dividendsbut the economic size is rather small
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over-identifying testOLS regression of the second-stage
residuals on all exogenous variables (including the two IVs)
the R2 is 0.0000The two IVs are exogenous
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RobustnessOther measures of discretionary
accrualsTeoh et al. (1998), Dechow and Dichev
(2002), and Ball and Shivakumar (2005)How to measure accruals is
independent for the dampening effect of investment on
dividendsthe endogeneity tests
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ConclusionsDividend policy is at least simultaneously determined
with investment decisions (Brav et al 2005)The irrelevance theorem of Miller and Modigliani
(1961) may be questionable (DeAngelo and DeAngelo 2006)
The competition between dividends and investmentis small in sizecan be mitigated by managers’ use discretionary
accrualsIt is inconclusive for the propensity to pay dividends
for discretionary accruals
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