The Adjustment of Dividends to Permanent Earnings
The formation of permanent earnings expectations in dividend adjustment is considered explicitly. An adjustment model consistent with the rational expectations hypothesis is formulated to analyze corporate dividend behavior. The analysis shows that the proposed rational expectations model is more general than previous models for examining the individual firm's dividend adjustment. A nonlinear regression model is used to estimate the parameters of the model and test the validity of the rational expectations-permanent earnings hypothesis in dividend decision making. The partial adjustment model with rational expectations explains corporate dividend behavior very well. The results suggest that firms make use of the earnings information to form optimal estimates of permanent earnings and that firms' dividend adjustment processes are completed in about 3 quarters. The empirical results are consistent with the dividend information hypothesis and market rationality.
Southern Economic Journal
WU, Chunchi and Kao, C..
The Adjustment of Dividends to Permanent Earnings. (1992). Southern Economic Journal. 58, (4), 1058. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/811