Mind mapping the topic of dividend policy

Mind mapping the topic of dividend policy (DP)

Joseph Kim-keung Ho

Independent Trainer

Hong Kong, China

Abstract: The topic of dividend policy (DP) is a main one in Accounting and Finance. This article makes use of the mind mapping-based literature review (MMBLR) approach to render an image on the knowledge structure of dividend policy. The finding of the review exercise is that its knowledge structure comprises four main themes, i.e., (a) Descriptions of basic concepts and information (b) Major underlying theories and thinking, (c) Main research topics and issues, and (d) Major trends and issues related to practices. There is also a set of key concepts identified from the DP literature review. The article offers some academic and pedagogical values on the topics of DP, literature review and the mind mapping-based literature review (MMBLR) approach.

Key words: Dividend policy (DP), literature review, mind map, the mind mapping-based literature review (MMBLR) approach

Introduction

Dividend policy (DP) is a main topic in Accounting and Finance. It is of academic and pedagogical interest to the writer who has been a lecturer on Accounting and Finance for some tertiary education centres in Hong Kong. In this article, the writer presents his literature review findings on DP using the mind mapping-based literature review (MMBLR) approach. This approach was proposed by this writer in 2016 and has been employed to review the literature on a number of topics, such as supply chain management, strategic management accounting and customer relationship management (Ho, 2016). The MMBLR approach itself is not particularly novel since mind mapping has been employed in literature review since its inception. The overall aims of this exercise are to:

1.      Render an image of the knowledge structure of dividend policy  (DP) via the application of the MMBLR approach;

2.      Illustrate how the MMBLR approach can be applied in literature review on an academic topic, such as DP.

The findings from this literature review exercise offer academic and pedagogical values to those who are interested in the topics of DP, literature review and the MMBLR approach. Other than that, this exercise facilitates this writer’s intellectual learning on these three topics. The next section makes a brief introduction on the MMBLR approach. After that, an account of how it is applied to study DP is presented.

On mind mapping-based literature review

The mind mapping-based literature review (MMBLR) approach was developed by this writer in 2016 (Ho, 2016). It makes use of mind mapping as a complementary literature review exercise (see the Literature on mind mapping Facebook page and the Literature on literature review Facebook page). The approach is made up of two steps. Step 1 is a thematic analysis on the literature of the topic chosen for study. Step 2 makes use of the findings from step 1 to produce a complementary mind map. The MMBLR approach is a relatively straightforward and brief exercise. The approach is not particularly original since the idea of using mind maps in literature review has been well recognized in the mind mapping literature. The MMBLR approach is also an interpretive exercise in the sense that different reviewers with different research interest and intellectual background inevitably will select different ideas, facts and findings in their thematic analysis (i.e., step 1 of the MMBLR approach). Also, to conduct the approach, the reviewer needs to perform a literature search beforehand. Apparently, what a reviewer gathers from a literature search depends on what library facility, including e-library, is available to the reviewer. The next section presents the findings from the MMBLR approach step 1; afterward, a companion mind map is provided based on the MMBLR approach step 1 findings.

Mind mapping-based literature review on dividend policy (DP): step 1 findings

Step 1 of the MMBLR approach is a thematic analysis on the literature of the topic under investigation (Ho, 2016). In our case, this is the DP topic. The writer gathers some academic articles from some universities’ e-libraries as well as via the Google Scholar. With the academic articles collected, the writer conducted a literature review on them to assemble a set of ideas, viewpoints, concepts and findings (called points here). The points from the DP literature are then grouped into four themes here. The key words in the quotations are bolded in order to highlight the key concepts involved.

Theme 1: Descriptions of basic concepts and information

Point 1.1.              “Dividend policy refers to the payout policy that a firm follows in determining the size and pattern of cash distributions to shareholders overtime … The term policy rejects the possibility of randomness and arbitrariness in determining its pattern and size and implies some consistency and predictability” (Jabbouri, 2016);

Point 1.2.               “It is well-known that firms smooth their dividend payments relative to earnings. Lintner … finds that firms in the US pay dividends smoothly to maintain a target long-run payout ratio” (Jeong, 2013);

Theme 2: Major underlying theories and thinking

Point 2.1.              “According to Lintner’s partial adjustment model, companies aim to pay out a certain per cent of permanent or core earnings as dividends and slowly adjust their current payouts to the target ratio” (Goncharov and Triest, 2011);

Point 2.2.                “According to the free cash flow hypothesis …, managers invest in projects with negative net present values in order to increase personal utility by a growth in power and company size. Such an overinvestment problem can be counteracted by increasing dividend payments in order to reduce free cash flow available to the management of a firm. Therefore, all other things being equal, corresponding agency costs are decreasing in dividends” (Breuer, Rieger and Soypak, 2014);

Point 2.3.               “….controllers of group-affiliated companies prefer to increase chair and board compensation rather than dividends as their cash-flow rights decrease” (Urzúa I., 2009);

Point 2.4.              “…firms with weak corporate governance are more likely to pay smoothed dividends to mitigate high agency cost. In fact, Michaelly and Roberts … document that privately held firms smooth dividends less than publicly held firms do. They suggest that ownership structure influences the pattern of dividend smoothing” (Jeong, 2013);

Point 2.5.               “At the empirical level, and in spite of the large volume of evidence having become available, results remain mixed. For example,while Lang and Litzenberger … report evidence in support of the agency theory for payment of dividends, Denis, Denis, and Sarin … find the evidence that fails to provide such support” (Bildik, Fatemi and Fooladi, 2015);

Point 2.6.              “At the theoretical level, most extant research has dealt with examining and/or questioning of the assumptions underlying M&M's model. For the most part, such works focus on the mechanism of how the presence of market inefficiencies, limitations in arbitrage, and investor irrationality may render dividend policy value relevant” (Bildik, Fatemi and Fooladi, 2015);

Point 2.7.              “If firm management correctly assesses the implications of transitory fair value increments for future earnings, fair value adjustments are not distribution relevant, and no relationship between fair value adjustments and dividends is expected. However, if management judges the adjustments to be persistent, this may impact dividend distributions” (Goncharov and Triest, 2011);

Point 2.8.              “Lintner … and Gordon …. argued that the investors valued dividends more than capital gains and the more money a company pays as dividend the more valuable it becomes, therefore the dividend policy is relevant. This theory, known as “bird in hand theory”, states that the money paid to shareholders is more valuable than the money reinvested” (Kaźmierska-Jóźwiak, 2015);

Point 2.9.               “Litzenberger and Ramaswamy …. claims that investors prefer lower payout companies for tax reasons. The implication of Litzenberger and Ramaswamy’s tax preference theory is that firms could increase their share prices by reducing dividends” (Kaźmierska-Jóźwiak, 2015);

Point 2.10.         “Lambert et al. … predict and find that the introduction of executive stock-option plans induces managers to reduce the dividend relative to the expected level. This is because the payment of dividend reduces the value of the options” (Eisdorfer, Giaccotto and White, 2015);

Point 2.11.         “Paying optional stock dividends instead of cash dividends allows a firm to payout a dividend while preserving cash equal to the fraction of the total dividend that shareholders choose to receive as stock. If all shareholders choose stock dividends, the result is equivalent in terms of cash flow and stock equity balance to the firm retaining earnings. Retaining earnings saves on taxes and transaction costs” (David and Ginglinger, 2016);

Point 2.12.         “Dividend signaling theory suggests that there is asymmetric information between inside managers and outside investors. To resolve the difference in information sets, managers take actions to signal information to investors. Dividends are viewed as a signal of firm stability, health, and as an indication of relatively predictable future earnings” (Lee and Mauck, 2016);

Point 2.13.         “Recently, scholars have developed the life-cycle theory of dividends … This theory contends that mature and established firms are more likely to pay dividends than young firms that have abundant growth opportunities ….with limited resources” (Fairchild, Guney and Thanatawee, 2014);

Point 2.14.         “According to this model [the behavioural explanation of dividend policy], people allocate their income in three different accounts: the current income account (I), the (current) asset account (A), and the future income account (F). Based on this differentiation, several reasons have been proposed to explain why investors with different preferences may prefer different dividend distributions” (Breuer, Rieger and Soypak, 2014);

Point 2.15.          “The market reaction to the announcement of optional stock dividends is a combination of three components: reaction to the cash dividend, reaction to the option to get stock and reaction to the equity offering part of the stock dividend” (David and Ginglinger, 2016);

Point 2.16.         “…dividend payments also increase the risk of default by reducing the amount of assets that is accessible for debt holders. … the observed dividend restrictions serve as a prerequisite for borrowing to take this issue under control. This would imply that firms with higher debt-equity ratios should favor lower dividend rates. This link is going to be especially important for firms with higher idiosyncratic risk” (Breuer, Rieger and Soypak, 2014);

Point 2.17.         “…dividend smoothing can increase wealth for investor by reducing the present value of the investor's future expected income tax liabilities. As tax treatment of dividend income becomes more unfavorable, it is likely that this will motivate firms to smooth dividends even further” (Jeong, 2013);

Point 2.18.         “…firm executives with high pension holdings will be reluctant to adopt a high dividend policy because this essentially commits the firm to a constant or growing level of dividends for the foreseeable future. Managers know, and the literature confirms, that once a firm starts paying dividends, cutting or omitting those dividends will have negative consequences in terms of both the stock price and the reputation of the managers” (Eisdorfer, Giaccotto and White, 2015);

Point 2.19.          “Bhattacharya …  shows that dividends represent costly signals. If a signal has no related cost then it may not be credible” (Lee and Mauck, 2016);

Point 2.20.         “Cross-country differences in banks’ propensity to pay dividends and level of dividend payments are likely Cross-country differences in banks’ propensity to pay dividends and level of dividend payments are likely to be affected by differences in corporate governance and legal institutions, as well by softer dimensions such as national culture that may influence excessive earnings retention or payment as dividends” (Zheng and Ashraf, 2014);

Point 2.21.          “Dividends create a constraint for managers that conflicts with their common objective of conserving cash and maintaining financial flexibility” (David and Ginglinger, 2016);

Point 2.22.         “In general, the literature suggests that managers who are heavily compensated with debt-based instruments, such as pensions, tend to manage the firm more conservatively because they are exposed to default risk” (Eisdorfer, Giaccotto and White, 2015);

Point 2.23.         “Large firms have easier access to capital markets and are more likely to pay dividends” (Kaźmierska-Jóźwiak, 2015);

Point 2.24.         “Liquidity condition of a firm is affected but also affects dividend decisions. Firms with higher cash availability are more likely to pay dividends than firms with insufficient level of cash” (Kaźmierska-Jóźwiak, 2015);

Point 2.25.         “On bank-level, low capitalized banks can be under severe regulatory pressure for increasing capital by not paying dividends than the banks which either meet regulatory capital requirements or operate with the capital levels significantly above regulatory minimum requirements. Similarly, on country-level, banks in some countries may face more stringent capital requirements than the banks in other countries which have less stringent capital requirements” (Zheng and Ashraf, 2014);

Point 2.26.         “Optional stock dividends allow firms to issue new shares directly to shareholders without the help of an investment bank … and thus save firms a large part of the flotation costs. A major cost associated with optional stock dividends is the discount offered to shareholders opting for stock dividends” (David and Ginglinger, 2016);

Point 2.27.         “Profitability has been found as one of the most important determinants of dividend policy. The pecking order theory, which explains how companies prioritize their financing sources, states that firms prefer to use internal funds. When internal funds are insufficient to meet financial needs, firms turns to debt (first to risk free, then risky debt), and finally equity. Myers … suggests that this behavior may be due the cost of issuing new equity” (Kaźmierska-Jóźwiak, 2015);

Point 2.28.          “The P/E ratio implicitly incorporates the risk of a company's future earnings. … high P/E ratio suggest that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. High P/E ratio may be associated with low risk and higher payout ratios” (Kaźmierska-Jóźwiak, 2015);

Point 2.29.         “…dividend payouts are associated with more persistent earnings, higher accrual quality, and greater earnings informativeness” (Deng, Li and Liao, 2017);

Point 2.30.         “The signaling and free cash flow hypotheses are two major theories that have been developed to explain corporate dividend policy. The signaling hypothesis … states that, under asymmetric information, managers pay dividends to convey signals to investors about the firm's future profitability. Alternatively, the free cash flow hypothesis … states that dividends help address agency problems between managers and outside investors” (Fairchild, Guney and Thanatawee, 2014);

Point 2.31.         “Abreu and Gulamhussen … find that firm characteristics such as size, profitability and growth opportunities suggested by Fama and French ….. as significant determinants of dividend policies are relevant for banks. They conclude that bank holding companies having big size and higher profitability pay more dividends, whereas, the bank holding companies having more growth opportunities pay lower dividends” (Zheng and Ashraf, 2014);

Theme 3: Main research topics and issues

Point 3.1.              “… a significant body of literature has been devoted to the question of dividends and their value relevance. The extensive body of literature that has since emerged includes the treatment of the issue both at the theoretical and at an empirical level, with the latter representing the lion's share of the contributions” (Bildik, Fatemi and Fooladi, 2015);

Point 3.2.              “…. up to now, there has been no empirical analysis aiming at explaining cross-country differences in corporate dividend policy by behavioral patterns. Furthermore, previous behavioural approaches have not discussed empirically which factors would drive investors’ demand for dividends in the first place and they have not yet succeeded in tying behavioral factors to investors’ dividend demand empirically in a straightforward way” (Breuer, Rieger and Soypak, 2014);

Point 3.3.              “…there is an emerging literature which studies the impact of female directors and managers on specific corporate decisions. This literature tends to concur that female directors and managers have a significant impact on these decisions” (Chen, Leung and Goergen, 2017);

Point 3.4.              “Despite their theoretical elegance, earlier signalling models did not match some well-established empirical facts. It is large firms with less asymmetric information that make the largest dividend payout. It is small and young firms with the most need to communicate with market that tend to do little or no dividend payment. Finally, dividend payments are too stable to be a signal of future earnings” (Shapiro and Zhuang, 2015);

Point 3.5.              “In markets that are far from being perfect, distinguished by information asymmetry, agency problems of debt and equity, and prudent and, often, irrational investors, the irrelevance theory proposed by Miller and Modigliani … is no more a satisfactory answer” (Jabbouri, 2016);

Point 3.6.              “There is an extensive body of prior literature, using a variety of research designs that has failed to provide strong and consistent evidence of dividend tax capitalization” (Hanlon, Myers and Shevlin, 2003);

Point 3.7.              “Whether and to what extent dividend taxes are capitalized into share prices is of particular interest because the capitalization of dividend taxes has potential implications for the tax benefits of debt relative to equity, organizational form choice, the cost of capital for firms, tax clienteles and firm dividend policy” (Hanlon, Myers and Shevlin, 2003);

Point 3.8.              “DeAngelo et al. …. find no support that dividend changes can identify firms with superior future earnings. Dividends are not seen as good signals because they might incorporate behavioral bias of managers that overestimate firms' prospects” (Lee and Mauck, 2016);

Point 3.9.              “Since Miller and Modigliani …  put forward the hypothesis concerning the “information content of dividends,” which argues that dividends could convey information about firms’ future cash flow, numerous studies have examined whether dividends indicate firms earnings. One stream of the literature examines the association between dividends and stock price, and most of the studies find that stock price has a significant reaction to a change in dividend policies and that investors regard dividends as providing corroborative evidence for the announced earnings” (Deng, Li and Liao, 2017);

Point 3.10.         “Stock distributions either by stock splits or stock dividends are puzzling corporate behaviour. In theory, these distributions are cosmetic operations aimed at dividing the corporate pie into more pieces with no change in the total value of the firm. However, previous empirical studies report a significant positive market reaction on the announcement day, often related to a combination of signaling, liquidity, attention-getting, and retained earnings hypotheses” (Adaoglu and Lasfer, 2011);

Point 3.11.         “Lintner's …  survey evidence indicates that managers are reluctant to cut dividends because doing so has a negative impact on stock price, and they do not raise dividends if they are not confident that the firm's profitability will improve. This suggests that, if the signaling hypothesis is supported, dividend changes should be followed by profitability changes in the same direction. Many researchers have attempted to test this implication of the signalling hypothesis, but the results are inconclusive” (Fairchild, Guney and Thanatawee, 2014);

Point 3.12.         “Since the existing research on dividend policy is replete with evidence from the U.S. and developed markets, researchers have recently started looking at corporate dividend policy of firms in emerging markets, and have increasingly recognized that dividend policy may be affected by the international context in which it occurs” (Fairchild, Guney and Thanatawee, 2014);

Point 3.13.         “….firms with a larger fraction of female directors on their board have greater dividend payouts” (Chen, Leung and Goergen, 2017);

Theme 4: Major trends and issues related to practices

Point 4.1.              “Aharony and Swary … find that the stock price has a more obvious reaction to dividends than to earnings, and they explain this result as indicating that the management can time dividends announcements but cannot time earnings announcements, so dividends could provide more information about firms’ true performance” (Deng, Li and Liao, 2017);

Point 4.2.              “Lie ….. confirms that firms that historically experienced high earnings volatility tend not to pay dividends” (Shapiro and Zhuang, 2015);

Point 4.3.              “…. several studies …have reported that managers view dividend stability as one of the most important factors in payout policy. Firms that decrease or omit dividends suffer a severe decline in value …, making managers reluctant to cut dividends” (David and Ginglinger, 2016);

Point 4.4.              “…empirical research  …indicates that …There is a significant positive reaction to a dividend increase and an even stronger negative reaction to a dividend cut” (Shapiro and Zhuang, 2015);

Point 4.5.              “Allen et al…. and Leary and Michaely …. find evidence showing that institutional investors are more likely to hold dividend smoothing stocks. In contrast, Javakhadze et al…… document that ownership concentration negatively affects dividend smoothing” (David and Ginglinger, 2016);

Point 4.6.              “Although it started to change in recent years, dividends are typically more heavily taxed than capital gains and, thus, paying dividends makes little sense under those considerations” (Breuer, Rieger and Soypak, 2014);

Point 4.7.              “Brav et al. … find evidence supporting the role of dividends as a signal of the firm’s ability to commit to long-term stable cash flows” (Shapiro and Zhuang, 2015);

Point 4.8.              “Considering China's special institutional settings, … Dedman et al. …  find that cash dividends could convey value-relevance information and have predictive power for future earnings and future cash dividends. When firms do not pay cash dividends, stock dividends could also take the role of cash dividends” (Deng, Li and Liao, 2017);

Point 4.9.              “Considering China's special institutional settings, … the investors respond negatively to the announcement of cash dividends, as investors regards the cash dividends as instrument of tunneling used by the non-tradable shareholders” (Deng, Li and Liao, 2017);

Point 4.10.         “Yoon and Starks … show that dividend increases lead to capital expenditure increases. Dividend changes are associated with revisions in analyst earnings forecasts” (Lee and Mauck, 2016);

Point 4.11.         “French firms will use optional stock dividends as backdoor equity during periods of economic downturns when they are unable to raise equity on the market at an acceptable cost” (David and Ginglinger, 2016);

Each of the four themes has a set of associated points (i.e., idea, viewpoints, concepts and findings). Together they provide an organized way to comprehend the knowledge structure of the dividend policy (DP) topic. The bolded key words in the quotation reveal, based on the writer’s intellectual judgement, the key concepts examined in the DP literature. The referencing indicated on the points identified informs the readers where to find the academic articles to learn more about the details on these points. The process of conducting the thematic analysis is an exploratory as well as synthetic learning endeavour on the topic’s literature. Once the structure of the themes, sub-themes[1] and their associated points are finalized, the reviewer is in a position to move forward to step 2 of the MMBLR approach. The MMBLR approach step 2 finding, i.e., a companion mind map on DP, is presented in the next section.

Mind mapping-based literature review on DP: step 2 (mind mapping) output

By adopting the findings from the MMBLR approach step 1 on dividend policy (DP), the writer constructs a companion mind map shown as Figure 1.

Referring to the mind map on DP, the topic label is shown right at the centre of the map as a large blob. Four main branches are attached to it, corresponding to the four themes identified in the thematic analysis. The links and ending nodes with key phrases represent the points from the thematic analysis. The key phrases have also been bolded in the quotations provided in the thematic analysis. As a whole, the mind map renders an image of the knowledge structure on DP based on the thematic analysis findings. Constructing the mind map is part of the learning process on literature review. The mind mapping process is speedy and entertaining. The resultant mind map also serves as a useful presentation and teaching material. This mind mapping experience confirms the writer’s previous experience using on the MMBLR approach (Ho, 2016). Readers are also referred to the Literature on literature review Facebook page and the Literature on mind mapping Facebook page for additional information on these two topics.

Concluding remarks

The MMBLR approach to study DP provided here is mainly for its practice illustration as its procedures have been refined via a number of its employment on an array of topics (Ho, 2016). No major additional MMBLR steps nor notions have been introduced in this article. In this respect, the exercise reported here primarily offers some pedagogical value as well as some systematic and stimulated learning on dividend policy (DP) in Accounting and Finance. Nevertheless, the thematic findings and the image of the knowledge structure on DP in the form of a mind map should also be of academic value to those who research on this topic.

Bibliography

1.      Adaoglu, C. and M. Lasfer. 2011. “Why Do Companies Pay Stock Dividends? The Case of Bonus Distributions in an Inflationary Environment” Journal of Business Finance & Accounting 38(5) & (6): 601-627.

2.      Bildik, R., A. Fatemi and I. Fooladi. 2015. “Global dividend payout patterns: The US and the rest of the world and the effect of financial crisis” Global Finance Journal 28, Elsevier: 38-67.

3.      Breuer, W., M.O. Rieger and K.C. Soypak. 2014. “The behavioral foundations of corporate dividend policy a cross-country analysis” Journal of Banking & Finance 42, Elsevier: 247-265.

4.      Chen, J., W.S. Leung and M. Goergen. 2017. “The impact of board gender composition on dividend payouts” Journal of Corporate Finance 43, Elsevier: 86-105.

5.      David, T. and E. Ginglinger. 2016. “When cutting dividends is not bad news: The case of optional stock dividends” Journal of Corporate Finance 40, Elsevier: 174-191.

6.      Deng, L., S. Li and M. Liao. 2017. “Dividend and earnings quality: Evidence from China” International Review of Economics and Finance 48, Elsevier: 255-268.

7.      Eisdorfer, A., C. Giaccotto and R. White. 2015. “Do corporate managers skimp on shareholders’ dividends to protect their own retirement funds?” Journal of Corporate Finance 30, Elsevier: 257-277.

8.      Fairchild, R., Y. Guney and Y. Thanatawee. 2014. “Corporate dividend policy in Thailand: Theory and evidence” International Review of Financial Analysis 31, Elsevier: 129-151.

9.      Goncharov, I. and S.v. Triest. 2011. “Do fair value adjustments influence dividend policy?” Accounting and Business Research 41(1) March, Routledge: 51-68.

10. Hanlon, M., J.N. Myers and T. Shevlin. 2003. “Dividend taxes and firm valuation: a re-examination” Journal of Accounting and Economics 35, Elsevier: 119-153.

11. Ho, J.K.K. 2016. Mind mapping for literature review – a ebook, Joseph KK Ho publication folder October 7 (url address: http://josephkkho.blogspot.hk/2016/10/mind-mapping-for-literature-review-ebook.html).

12. Jabbouri, I. 2016. “Determinants of corporate dividend policy in emerging markets: Evidence from MENA stock markets” Research in International Business and Finance 37, Elsevier: 283-298.

13. Jeong, J. 2013. “Determinants of dividend smoothing in emerging market: The case of Korea” Emerging Markets Review 17, Elsevier: 76-88.

14. Kaźmierska-Jóźwiak, B. 2015. “Determinants of Dividend Policy: Evidence from Polish Listed Companies” Procedia Economics and Finance 23, Elsevier: 473-477.

15. Lee, B.S. and N. Mauck. 2016. “Dividend initiations, increases and idiosyncratic volatility” Journal of Corporate Finance 40, Elsevier: 47-60.

16. Literature on literature review Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.literaturereview/).

17. Literature on mind mapping Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.mind.mapping/).

18. Shapiro, D. and A. Zhuang. 2015. “Dividends as a signaling device and the disappearing dividend puzzle” Journal of Economics and Business 79, Elsevier: 62-81.

19. Urzúa I., F. 2009. “Two few dividends? Groups’ tunnelling through chair and board compensation” Journal of Corporate Finance 15, Elsevier: 245-

20. Zheng, C. and B.N. Ashraf. 2014. “National culture and dividend policy: International evidence from banking” Journal of Behavioral and Experimental Finance 3, Elsevier: 22-40.

---

[1] There is no sub-theme generated in this analysis on DP.