Behavior Dividend Policy

Being one of the most classical fields in science of finance, dividend policy is still a much-debated problem yet to be solved over the last five decades. Traditional finance research on dividend started with the debate between the dividend irrelevance and relevance propositions. Afterwards researchers turned to gradually relax the assumptions of MM theorem and three important theories on dividend, the clientele effect, the signaling models and agency theory, were thereof put forward. Despite the distribution on unveiling dividend policy in various aspects, those theories persist in their own opinions and many doubtful points left behind. And so far none of them could explain the whole puzzle of dividend. On the one hand, when reviewing the studies on MM theorem, researchers found that several assumptions were relaxed such as no taxes, information symmetry and perfect agency assumption, but the "rational man" assumption remains untouched upon and the possible impacts of human behavior bias on dividend were ignored by those studies. Shiller (1984) pointed out that it is very difficult to explain the irrational preference to dividend by investors unless aforesaid impacts were taken into consideration in future models. Miller (1986) agreed that being an important part of most micro decision making, behavioral elements could not be ignored and the introduction of behavioral elements in dividend policy might help resolve longstanding anomalies. On the other hand, as a method of resource allocation, the payment of dividend has two sides: supply and demand. Traditional research on dividend policy, such as the clientele effect, only considers the demand side or the subjective analysis on the payment behavior by the demand side and ignores the manager behavior and the incentives behind it as the supply side. Therefore, it is necessary to study dividend payment from the standpoint of the supply side (Baker and Wurger, 2004a) .In recent years, with the development of experimental psychology and behavioral science, the behavioral elements have been introduced into finance study. Behavior corporate finance has been a rising field and the study in the sight of manager behavior is becoming one of the frontier topics in the field of dividend policy. In 2003, Gurtler and Hartmann put forward the term "behavior dividend policy" in their working paper, the behavior dividend policy, which is the first time the term stepped onto the stage of dividend research. But it's a pity they only point out that behavior dividend policy is a part of behavior corporate finance and actually they don't elaborate and define the concept's connotation and extension. Some influential works afterwards, such as Bake and Wurger (2004a, 2004b), Li and Lie (2005), studied dividend policy from the standpoint of behavior. But they are unsystematic and isolated from each other. Until now there is no research which classifies those works under the field of behavior dividend policy and no systematic research focusing on the field of behavior dividend policy. The empirical research in this field was underdeveloped therefor the empirical evidences are rare. The paper aims to do some research focusing on the behavior dividend policy.Another reason for choosing this topic is that a new anomaly which is never mentioned before in the works on dividend policy was found in this paper - the dividend clustering phenomena in the listed companies of China. We found that 80% of the listed companies paid cash dividend under 0.2 RMB Yuan per share. The dispersion of dividend in China showed in coefficient of variation only equals to 1/3 of that in America. What is the origin of the dividend clustering phenomena? Since the traditional dividend policy theories can not explain this phenomena, it will be helpful for us to introduce behavioral elements to analyse the cause of the phenomena (Shefrin and Statman, 1984). So, using "behavior dividend policy" as a tool, the paper is intended to explain the dividend clustering phenomena in listed companies of China by discussing the impacts from manager behavior to corporate dividend policy.The paper begins with a literature review and then followed by background analysis and empirical research. It is divided into eight chapters.Chapter one is an introduction of the research issues, contents, framework, methods and the contributions of the paper.Chapter two is literature review of researches on traditional dividend policy. This chapter reviews the dividend irrelevance propositions in perfect market and then introduces how the assumptions of MM theorem were relaxed by theories of modern dividend policy so as to form taxes clienteles, signal models and agency hypothesis. Finally, a summary and discussion of the challenges that the traditional dividend policy theories face will be made.Chapter three shows the phenomena of dividend clustering of listed companies in China. This chapter firstly points out that the dividend clustering phenomena happens in every year and its distribution has various characters in different industries. After analysis the chapter concludes that traditional research on dividend policy in west countries can not explain the dividend clustering phenomena in China.Chapter four is a literature review of behavior dividend policy. The chapter shows how the behavior dividend policy was formed and then points out two possible branches developing from it - the catering theory and the herding theory of dividend. After that, the chapter reviews the literature of two branches separately, which is providing the theoretical foundation of empirical research thereof.Chapter five is empirical research on relationship between herding behavior of managers and dividend clustering. There are two parts in the chapter: part one examines whether the herding behavior of managers exists in dividend payment, and part two discusses if the herding behavior of dividend payment relates to the reputation of the company.Chapter six is empirical research on relationship between catering behavior of managers and dividend clustering. There are also two parts in the chapter: part one studies if the managers of listed companies in China cater to the preference of tradable shareholders in dividend payment and part two shows if the managers cater to the cash preference of leading (untradeable) shareholders.Chapter seven is a joint examination of behavior dividend policy. Tobit model was used in this chapter to examine both herding and catering theories in one single model and to study "whether to pay" and "how much to pay" at the same time. This chapter is also a robustness testing of explanation of dividend clustering phenomena by behavior dividend policy.Chapter eight is the conclusion of this paper. It sonsists of the research finding, the lessons we learn, the limitations of the research and the directions for future research.This paper has reached the following conclusions:Firstly, herding behavior of managers can explain the dividend clustering phenomena of listed companies in China. On one hand, the payment decisions of manager will be influenced by the last average dividend level of leading companies and the last average dividend level of all the companies in the industry. On the other hand, company reputation is a factor which can influence herding behavior. The higher the reputation is, the lower probability in which herding behavior happens.Secondly, catering behavior of managers can also explain the dividend clustering phenomena of listed companies in China. Managers in China do not consider the preference of small and middle shareholders. They only cater to the cash demand of leading shareholders. The more shares concentrated, the more likely that managers turn to pay and at the same time the amount of dividend paid is higher. What's more, leading shareholders' preference is positive related to the level of concentration of the dividend for the listed companies in China. That's one of the reasons why the dividend clustering phenomena will happen.Thirdly, using a Tobit model to examine the behavior dividend policy theories, the paper finds that both herding and catering behavior of managers can explain why the dividend will cluster. The company reputation and shares concentration will influence dividend clustering positively.In a word, this paper offers evidences that herding and catering behavior of managers can explain the dividend behavior of listed companies in China. The consideration to company reputation and leading shareholders' preference are incentives of the dividend payment. As a result, the behavioral elements are important factors to influence dividend payment, and the theory of behavior dividend policy can explain the dividend clustering phenomena of listed companies in China.The major contributions and innovations of this paper are in the following aspects: in subject selection, the paper is a precursor to study the dividend clustering phenomena of listed companies in China, which enriches the research on the dividend puzzle. In literature review, this paper is the first work that applies herding behavior of managers in the area of dividend and integrates the literatures of the herding and catering behavior of managers under the theories on behavior dividend policy. In the empirical study, this paper applies the Tobit model to examine dividend clustering phenomena, which can reduce the risk of sample selection bias that might happens in linear regression models.This paper discusses the impact on dividend clustering phenomena of behavior dividend policy from the single perspective of empirical research. But, for the aspect of building a formal model to elaborate manager behavior especially the impacts on dividend policy from herding behavior of managers, much progress needs yet to be made.