The role of dividends in privately held firms
Abstract
The dividend puzzle is still unsolved, and even more so in a privately held context. Dividend policy plays a crucial role in investment and finance decisions of firms and firm valuations. A large literature has investigated the dividend policy of listed firms, however, we still know relatively little about the dividend policies of privately held firms, even though most firms in the economy are not listed. Firstly, we investigate how dividends evolve over privately held firms’ lives. We find that as retained earnings of privately held firms increase, firms are more likely to pay dividends and pay out higher dividend amounts. Firms are also more likely to initiate (omit) a dividend as their retained earnings increase (decrease) over time. Overall, we find a support of the dividend life cycle theory in the context of privately held firms. Next, we go a step further by applying a variance decomposition method to explore how much the firm-year, firm, and industry level effects simultaneously contributes to dividend policy of Small and Medium Sized Enterprises (SMEs). Previous research on dividend policies has been largely focused on these determinants in isolation, however, that provide an incomplete picture of the overall drivers of dividend policy. Our study reveals that firm-year and firm-level differences explain most of the variance of dividend policies which is in line with the resource based theory. Industry-level differences and region differences matter very little for dividend policy of SMEs. Finally, we investigate how the most recent global crises caused by COVID19 pandemics impacted privately held firms dividend decisions.
Funding
BOF
Researchers
- Prof. dr. Ine Paeleman (promotor)
- Jovana Cadenovic