The firm 'life-cycle' hypothesis and dividend policy: Tests on propensity to pay, dividend initiation, and dividend growth rates.

摘要

Prior research advances a “life-cycle” or maturity hypothesis to explain the corporate dividend policy for industrial firms. Empirical studies show that young firms with ample investment opportunities do not pay dividends while mature firms with limited investment opportunities pay dividends. However, prior investigations of the life-cycle hypothesis utilize different measures of maturity that capture different dimensions of a firm’s life-cycle. The prior studies show that firm age, the earned capital ratio, and risk are statistically significant measures of maturity when tested independently. This dissertation investigates all these measures of firm maturity jointly in order to determine which maturity variable or combination of maturity variables best explains a firm’s dividend policy. The investigation indicates that firm maturity is a complex concept. Age, earned capital ratio, and standard deviation (total risk) all contribute to the definition of maturity, and the relationship between dividend policy and the life-cycle is better quantified by combinations of these variables.;Firms with dividend policies that follow the life-cycle model have higher valuations than firms with contrary dividend policies. Empirical evidence supports that the life-cycle model is consistent with maximizing firm value.;The dissertation provides an answer to Black’s (1976) dividend puzzle. Firms pay a dividend to maximize their valuation, depending on their maturity. By combining valuation with the life-cycle, I can empirically indicate when a firm should pay a dividend in the life-cycle. Furthermore, the investigation offers an explanation to Fama and French’s (2001) “disappearing dividends” phenomena. “Disappearing dividends” occurs due to the decline in propensity to pay by marginal dividend payers. The decline in these “over-zealous” dividend payers is due to the decline in the valuation premium.;Consistent with the maturity hypothesis, the dividend payout ratio increases with firm maturity; however, the dividend growth rate declines with firm maturity. A life-cycle model for the dividend growth rate is better than the sustainable growth estimate.