Flexibility of Dividend Policies and Shareholders' Returns in the European Union
Posted: 19 Mar 2009
Date Written: March 16, 2009
We measure flexibility of dividend policy and study its impact on abnormal shareholders' returns in the European Union. When we use relative repurchase frequency and relative repurchase amounts as a measure of flexibility, civil law companies are more flexible. A more frequent use of repurchases does not increase company value, while persevering in relatively high repurchase amounts does, in particular in civil law companies. If changes in dividend policies are considered as measures of flexibility, we expect (and find) larger shareholders' reactions in common law countries. If changes in the speed of adjustment to target payout ratios and the change in target payout ratios under net income increases and decreases are used as a measure of flexibility, common law countries are less flexible than civil law companies. Shareholders evaluate fast adjustment to a new target payout ratio under net income reductions in civil law companies with a long track record, while common law shareholders in such companies prefer a higher target payout ratio with increases in net income.
Keywords: Dividend policy, flexibility, abnormal returns, European Union
JEL Classification: G35, G34, G14, G15
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