Smoothed or not smoothed: The impact of the 2008 global financial crisis on dividend stability in the UK

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Abstract

This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008-2017. Using a modified version of Lintner’s (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008-2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013-2017.
Original languageEnglish
Article number101423
JournalFinance Research Letters
Early online date30 Dec 2019
DOIs
Publication statusE-pub ahead of print - 30 Dec 2019

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Dividends
Global financial crisis
Payout
Cash dividends
Dividend policy
London Stock Exchange
Credit crunch
Partial adjustment model
Financial crisis
Payment
Dividend smoothing
Earnings changes

Cite this

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title = "Smoothed or not smoothed: The impact of the 2008 global financial crisis on dividend stability in the UK",
abstract = "This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008-2017. Using a modified version of Lintner’s (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008-2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013-2017.",
keywords = "dividend stability, dividend smoothing, financial crisis, Speed of Adjustment, the UK",
author = "Erhan Kilincarslan",
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journal = "Finance Research Letters",
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N2 - This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008-2017. Using a modified version of Lintner’s (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008-2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013-2017.

AB - This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008-2017. Using a modified version of Lintner’s (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008-2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013-2017.

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