Inflation and the dividend policy of US firms
Abstract
Purpose
The purpose of this paper is to analyse the dividend policy of firms from a macroeconomic perspective. In order to do so inflation and real growth are also considered.
Design/methodology/approach
The paper examines the relationship between dividends, corporate earnings, real growth and inflation in the USA by applying cointegration techniques. In this framework, impulse response analysis is used to test the two most popular theories of dividend determination.
Findings
The data indicate three cointegration relations among the four‐time series. Impulse response analysis then shows some interesting dynamics. Dividend smoothing seems to be a relevant phenomenon. Furthermore, inflation has a positive effect on dividends.
Research limitations/implications
The most important finding of this paper is the indication of a positive relationship between inflation and dividend payments. This can be interpreted in two different ways: managers may try to follow a dividend policy, which is perceived to be optimal, believing that there is a desirable level of real dividend income to be paid to their investors. On the other hand, inflation may simply increase the nominal value of corporate earnings and therefore the dividends paid. Independently from the interpretation of the results, inflation should definitely be considered analysing dividend policy.
Practical implications
Managers should also examine the inflationary environment formulating an adequate dividend policy for their firm.
Originality/value
The paper provides an as of yet widely ignored link between the micro‐ and macroeconomic sphere examining one of the most important problems of financial economics. Neglecting the effects of inflation on dividends may, among others, be one reason for the mixed empirical findings testing theories of dividend determination.
Keywords
Citation
Basse, T. and Reddemann, S. (2011), "Inflation and the dividend policy of US firms", Managerial Finance, Vol. 37 No. 1, pp. 34-46. https://doi.org/10.1108/03074351111092139
Publisher
:Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited