Some financial economists (like Higgins) do not accept that investors and managements who pay attention to dividends
Question:
Some financial economists (like Higgins) do not accept that investors and managements who pay attention to dividends are irrational. Consequently they try to build regression models to explain differences in payout ratios.
Intuitively, we would expect companies requiring large amounts of capital expenditure to choose lower dividend payout.
Higher payout reduces retained earnings and drives companies to capital markets every now and then.
Second, we would expect highly leveraged companies to have low payout ratios. These highly leveraged companies may view dividends as fixed costs and accordingly, may keep the payout ratio low in order to maintain dividends continuously.
Third, we would expect companies with riskier operation—that is, high business risk—to maintain low payout.
In sum, payout is a function of growth rate, financial leverage and beta (proxy for business risk).
The following data are available for an industry group:
Estimate a regression equation.
Step by Step Answer: