ABSTRACT
Although considerable progress has been made in empirical research over the past 20 years, unexplored territory remains. One such area concerns intra-firm dividend policies in a cross-border setting of firms. In this study, the dividend policy of firms is defined as the decision made about the level of dividends (i.e. the payout ratio) and about the adjustment of dividends (i.e. dividend smoothing), with a focus on the latter. What is dividend smoothing? “Dividend smoothing implies a deliberate effort on the part of managers to adjust dividend payments in response to variations in the earnings stream” (Bhabra et al. 2002: 166). We are interested in particular in explaining intra-firm dividend policies that take the form of intra-firm dividend smoothing. In spite of the fact that these policies constitute an important element in multinational enterprises’ (MNEs) financial policies, empirical evidence is rather scarce (see section 5.2). The setting for the dividend policy decision chosen in this chapter is a German parent company – that is, a German MNE that owns subsidiaries abroad. An MNE may finance its foreign operations through various means (equity, debt, etc.). If the foreign subsidiary is profitable, then the parent company may wish to shift some of the profits home to finance new investment. Obviously, the parent company may also have other options. For example, it may reinvest the profits at the subsidiary where it emerged or at other subsidiaries. However, these options are not the focus of this chapter. Furthermore, there are also many options for shifting profits back home from a foreign subsidiary. They include share repurchases, dividend payments, profit shifting via transfer pricing (for example, see Leibrecht and Rixen, this volume, Chapter 4, especially in subsection 4.3.2.3, “Tax-motivated profit shifting”), intra-firm debt flows and equity-related transactions. Some of these transactions
are exclusively intra-firm (the so-called intra-firm sphere) and some may be intra-firm as well as between the firm and its personal shareholders (i.e. the socalled personal shareholder sphere). This chapter provides a survey of empirical evidence on dividend policies of MNEs and discusses the determinants of dividend smoothing in the intra-firm case – that is, parent versus foreign subsidiary, with respect to the case of a German parent company. As a theoretical model, Lintner’s (1956) model has been used, as it has been shown to be relevant to the intra-firm context by Bellak et al. (2009), inter alia. Our survey of empirical studies has revealed a large gap between dividend smoothing in the personal shareholder and intra-firm spheres. With regard to shareholders, firms adjust dividends slowly, while intra-firm dividends are adjusted much more quickly. However, the aim of this study is not to explain this difference between personal and intra-firm sphere, but rather to analyze incentives and disincentives for the intra-firm dividend smoothing behavior of firms. Thus, we are only concerned with firms actually paying dividends. Our findings point to the fact that signaling and agency cost arguments are of minor importance for the dividend smoothing decision in the intra-firm context, but issues related to tax and business-related considerations play some role in explaining smoothing. The chapter is organized as follows. We start from a survey of empirical studies on dividend policies in the intra-firm and the personal shareholder spheres. Then we proceed to explain the smoothing behavior of firms by tackling its key determinants in the intra-firm context. Lastly, a short section summarizes the results.
