Medical, Pharma, Engineering, Science, Technology and Business

Graduate School of Systems and Information Engineering, University of Tsukuba, Japan

- *Corresponding Author:
- Chikashi Tsuji

Graduate School of Systems and Information Engineering

University of Tsukuba, Japan

**E-mail:**[email protected]

**Published date:** July 31, 2010

**Visit for more related articles at** Business and Economics Journal

This paper explores the determinants of the dividend policy of firms in the Japanese electrical appliances industry. First, our empirical investigations reveal that in this industry, corporate managers do not cater to investors’ demands in both their dividend initiation and continuation decisions. Instead, in the Japanese electrical appliances industry, the determinants of firms’ dividend policies are value-weighted dividend yields, valueweighted nonpayers’ size, and value-weighted after-tax earnings-to-total-asset ratios. Moreover, cross-sectionally, this paper finds relations between corporate earnings and firm dividend payments in general. However, on an aggregate time-series basis, dividend payments tend to decrease company earnings in the Japanese electrical appliances industry, and this means rejection of the traditional signaling hypothesis.

Catering theory of dividends; Dividend policy; Imperfect market; Inefficient market; Signaling hypothesis.

Miller and Modigliani (MM) [1] proved that dividend policy is irrelevant to share value in perfect and efficient capital markets. After
the proof was published, many researchers criticized it using different approaches.^{1}

Recently, a new interesting theory called the “catering theory of dividends” was developed by Baker and Wurgler (BW) [2]. Relaxing the assumption of perfect markets and efficient markets2 undertaken in MM [1], and considering psychological and institutional reasons, BW [2] suggested the following by constructing a simple theoretical model. First, some investors have an uninformed and perhaps time-varying demand for dividend-paying stocks. Second, arbitrage fails to prevent this demand from driving apart the prices of dividend payers and nonpayers. Third, managers rationally cater to investor demand—they pay dividends when investors put higher prices on payers, and they do not pay when investors prefer nonpayers.

As far as we know, this new theory has not been tested in Japan; thus, testing catering theory using Japanese data is an objective in this paper. More precisely, we test the catering theory of dividends in the Japanese electrical appliances industry, one of the most important industries in Japan. Furthermore, extending BW’s [2] analysis, we also explore the determinants of the dividend payments of Japanese electrical appliances industry firms from cross-sectional and aggregate time-series viewpoints.

The results derived in this paper are as follows. First, with regard to dividend initiations and continuations for Japanese electrical appliances industry firms, the dividend premium is not a determinant. This means that these firms in Japan do not behave as suggested by catering theory.

In contrast to the US case, value-weighted dividend yields, value-weighted nonpayers’ size, and value-weighted after-tax earnings-tototal- asset ratios are the determinants of one-year-ahead dividend initiations in Japanese electrical appliances industry firms.

Third, from a cross-sectional viewpoint, we find a relation between corporate earnings and firm dividend decisions; however, from an aggregate time-series viewpoint, we find that corporate earnings tend to decrease in the year following dividend initiations and continuations in the Japanese electrical appliances industry. This is important because the evidence is against the signaling hypothesis.

The rest of the paper is organized as follows. Section 2 summarizes BW’s [2] catering theory of dividends and our research design, Section 3 explains the data, Sections 4 and 5 present the empirical results, and Section 6 concludes the paper.

We test one theory and extend the research of BW [2]. First, the catering theory of dividends, which was developed by BW [2], suggested that real financial markets are imperfect and inefficient, and corporations make their dividend initiation and continuation decisions by catering for the investors’ demand for dividends. Typically, as in BW [2], the investors’ demands for dividends can be captured by the difference between payers’ M/Bs and nonpayers’ M/Bs, which corporate managers can observe through financial markets. Hence, catering theory predicts that when the payers’ M/Bs are higher than the nonpayers’ M/Bs, corporate managers make dividend initiations or dividend continuations by catering for the investors’ dividend demands.

After testing catering theory, we extend BW’s [2] analysis. More precisely, we explore the determinants of dividend initiations and continuations in the Japanese electrical appliances industry using both cross-sectional and aggregate time-series analysis.

First, our dividend payment measures follow BW [2]. All data in this study are from QUICK Corp. Our full sample period is from 1986 to 2006, and our focus in this study is on the Japanese electrical appliances industry firms. The largest number of firms of this industry is included in the NIKKEI 500 Index as at the end of December 2009. In accordance with BW [2], we count a firm-year observation as a payer if it has positive dividends per share by the ex date; otherwise, it is a nonpayer. To aggregate this firm-level data into useful time series, we made two aggregate identities following BW [2]:

*Payers _{t} = New Payers_{t} + Old Payers_{t} + List Payers_{t} , (1)*

*Old Payers _{t} = Payers_{t-1} – New Nonpayers_{t} – Delist Payers_{t} (2)*

The first identity defines the number of payers, and the second describes the evolution of the payers. Payers is the total number of payers, New Payers is the number of initiators among last year's nonpayers, Old Payers is the number of payers that also paid last year, List Payers is the number of payers this year that were not in the sample last year, New Nonpayers is the number of omitters among last year's payers, and Delist Payers is the number of last year's payers not in the sample this year. Note that lists and delists relate to the Tokyo Stock Exchange (TSE) First Section.

We then define three variables to capture dividend payment dynamics as in BW [2]:

(3)

(4)

(5)

In words, the rate of initiation (Initiate) is the fraction of surviving nonpayers that become new payers. The rate at which firms continue paying (Continue) is the fraction of surviving payers that continue paying. The rate at which new lists in the sample pay (Listpay) is payers as a percentage of new lists at time t. These variables capture the decision whether to pay dividends, not how much to pay.

**Table 1** lists the aggregate totals and the dividend payment variables for the Japanese electrical appliances industry. The initiation rate starts out low in 1987, then increases in the beginning of the 1990s, and then drops. After that, it rebounds in the late 1990s,
then decreases again in 2002, and then increases around the end of the sample. The rate at which firms continue paying varies less,
as expected. Note that the rate at which lists pay is always high, in contrast to the case of BW [2], where Listpay varies significantly.

Next are the stock market dividend premium variables. Conceptually, it is important to measure the difference between the market prices of firms that have the same investment policy and different dividend policies, because in the frictionless and efficient markets of MM [1], this price difference should be zero. However, with limits to arbitrage, BW [2] suggested that the uninformed demand for dividend-paying shares causes a price difference, which may vary over time.

We construct the dividend premium variable following BW [2], which is denoted as *P ^{D−ND}*. This is the difference in the logs of the
average market-to-book ratios of payers and nonpayers. We define market-to-book ratios following Fama and French (FF) [44, 45];
the market-to-book ratio is book assets minus book equity plus market equity all divided by book assets.

More precisely, we take equal- and (book) value-weighted averages of the market-to-book ratios separately for payers and nonpayers
in each year. Then we construct the final dividend premium series as the difference of the logs of these averages. These series are
listed in **Table 2**.

Moreover, we construct other variables for the additional tests in Section 5, and the details of the data are described in Sections 5.1 and 5.2.

First, we test whether catering theory holds in the Japanese electrical appliances industry. Namely, we first check the relation
between dividend payments and the stock market measures of dividend demand. To examine this relationship formally, **Table 3** regresses dividend payment measures on the lagged demand for dividend measures. More precisely, we estimate:

(6)

(7)

where Initiate is the rate of initiation, Continue is the rate of continuation, and *P ^{D−ND}* is the market dividend premium (value-weighted
or equally weighted). In the tables, all independent variables are standardized to have unit variance, and all standard errors are
robust to heteroskedasticity and serial correlation using the procedure of Newey and West [46].

Panel A of ** Table 3** reports that neither an increase in the value-weighted market dividend premium nor an increase in the equally
weighted market dividend premium is associated with an increase in the dividend initiation rate in the following year. Similarly,
neither an increase in the value-weighted market dividend premium nor an increase in the equally weighted market dividend
premium is associated with an increase in the dividend continuation rate in the following year. To sum up, in contrast to the US case
in BW [2], as far as we judge by the dividend premium measure, the dividend policy of Japanese electrical appliances industry firms
does not cater for investor dividend demand.

**Cross-sectional Tests**

This section also tests the determinants of the dividend payment cross-sectional basis. To do so, we first apply BW [2] and FF [19]- type logit models. Namely, our first cross-sectional contemporaneous logit models in this paper are as follows:

(8)

where y_{i,t} = 1 if the company is a payer and zero otherwise. In addition, TSEP means TSE First Section market capitalization percentile
(that is, the percentage of firms on the TSE First Section having smaller capitalization than firm i in that year), M/B denotes the
market-to-book ratio, dA/A is the total asset growth ratio, and E/A denotes the after-tax earnings-to-total-asset ratio.

To examine the one-year intertemporal relationships further, we also estimate the following intertemporal models:

(9)

(10)

where again *y _{i,t}* = 1 if the company is a payer and zero otherwise.

The results are shown in **Tables 4 to 6**. **Table 4** displays the results of logit models such as (9), and it indicates that the after-tax
earnings-to-total-asset ratio is statistically significant and positive excluding the period after the stock market crash of 1989 in Japan.
Hence, payers’ earnings are high in the year prior to paying dividends.

TSEP_{t−1} |
M/B _{t−1} |
dA/A _{t−1} |
E/A _{t−1} |
N |
McFadden R-squared | |
---|---|---|---|---|---|---|

1987 | 0.056**[0.009] | 0.279*[0.048] | 97 | 0.384 | ||

2.136[0.090] | 0.404*[0.014] | 97 | 0.291 | |||

0.021[0.588] | 0.441**[0.009] | 97 | 0.245 | |||

1988 | 0.031[0.231] | 1.462**[0.004] | 103 | 0.703 | ||

−0.820[0.596] | 1.612**[0.002] | 103 | 0.681 | |||

0.035[0.504] | 1.480**[0.004] | 103 | 0.685 | |||

1989 | 0.031[0.215] | 1.717**[0.007] | 105 | 0.544 | ||

−1.199[0.339] | 2.045**[0.001] | 105 | 0.528 | |||

0.016[0.753] | 1.930**[0.004] | 105 | 0.516 | |||

1990 | 0.026[0.242] | 0.275[0.307] | 107 | 0.244 | ||

−0.139[0.890] | 0.378[0.166] | 107 | 0.205 | |||

−0.016[0.731] | 0.388[0.149] | 107 | 0.208 | |||

1991 | −0.015[0.723] | 4.702[0.063] | 109 | 0.712 | ||

−3.781[0.292] | 7.646[0.170] | 109 | 0.752 | |||

0.257[0.331] | 5.045[0.125] | 109 | 0.766 | |||

1992 | 0.064**[0.010] | 0.529[0.056] | 113 | 0.335 | ||

0.041[0.971] | 0.823**[0.008] | 113 | 0.181 | |||

−0.009[0.322] | 0.786**[0.005] | 113 | 0.209 | |||

1993 | 0.015[0.201] | 0.472**[0.000] | 118 | 0.329 | ||

−1.252[0.187] | 0.572**[0.000] | 118 | 0.328 | |||

0.044[0.333] | 0.464**[0.002] | 118 | 0.323 | |||

1994 | 0.027*[0.019] | 0.396**[0.000] | 115 | 0.410 | ||

0.332[0.763] | 0.441**[0.000] | 115 | 0.363 | |||

−0.028[0.530] | 0.491**[0.000] | 115 | 0.318 | |||

1995 | 0.027*[0.031] | 0.648**[0.000] | 119 | 0.442 | ||

−0.691[0.313] | 0.807**[0.000] | 119 | 0.411 | |||

−0.032[0.329] | 0.830**[0.000] | 119 | 0.410 | |||

1996 | 0.033**[0.004] | 0.451**[0.003] | 121 | 0.314 | ||

−2.138[0.053] | 0.739**[0.000] | 121 | 0.288 | |||

−0.029[0.343] | 0.596**[0.000] | 121 | 0.243 | |||

1997 | 0.049**[0.001] | 0.718**[0.000] | 123 | 0.432 | ||

−0.254[0.750] | 0.618**[0.000] | 123 | 0.295 | |||

0.022[0.569] | 0.594**[0.001] | 123 | 0.297 | |||

1998 | 0.069**[0.000] | 0.360**[0.004] | 129 | 0.408 | ||

−0.639[0.384] | 0.459**[0.000] | 129 | 0.201 | |||

0.031[0.397] | 0.428**[0.000] | 129 | 0.201 | |||

1999 | 0.024*[0.022] | 0.802**[0.000] | 134 | 0.390 | ||

−0.172[0.876] | 0.888**[0.000] | 134 | 0.346 | |||

−0.012[0.793] | 0.890**[0.000] | 134 | 0.347 | |||

2000 | 0.018[0.100] | 0.360**[0.000] | 135 | 0.398 | ||

0.596[0.536] | 0.363**[0.000] | 135 | 0.380 | |||

0.151**[0.005] | 0.320**[0.000] | 135 | 0.448 | |||

2001 | 0.055**[0.000] | 0.190**[0.002] | 140 | 0.372 | ||

1.756*[0.031] | 0.175**[0.005] | 140 | 0.266 | |||

0.189**[0.001] | 0.165*[0.032] | 140 | 0.337 | |||

2002 | 0.007[0.347] | 0.184**[0.001] | 151 | 0.169 | ||

0.834[0.113] | 0.161**[0.004] | 151 | 0.182 | |||

0.015[0.389] | 0.192**[0.000] | 151 | 0.168 | |||

2003 | 0.030**[0.000] | −0.002[0.543] | 146 | 0.110 | ||

0.527[0.119] | −0.020[0.075] | 146 | 0.027 | |||

0.063**[0.008] | 0.001[0.846] | 146 | 0.056 | |||

2004 | 0.037**[0.002] | 0.173**[0.002] | 145 | 0.286 | ||

0.847*[0.030] | 0.201**[0.000] | 145 | 0.199 | |||

0.088*[0.038] | 0.163**[0.006] | 145 | 0.224 | |||

2005 | 0.037**[0.004] | 0.105*[0.011] | 151 | 0.184 | ||

−0.241[0.210] | 0.114*[0.028] | 151 | 0.085 | |||

−0.003[0.085] | 0.114*[0.024] | 151 | 0.105 | |||

2006 | 0.013[0.163] | 0.170*[0.026] | 162 | 0.134 | ||

−0.091[0.856] | 0.169*[0.029] | 162 | 0.117 | |||

−0.012[0.163] | 0.164*[0.023] | 162 | .0152 |

Notes: Cross-sectional logit models are estimated. For example, the estimated logit model is as follows:

yi,t=α+ϑ_{1}TSEPi,_{t+1}+ϑ_{2} (M/B)i,_{t+1}+ϑ_{3}(dA/A)i,_{t+1}+ϑ_{4}(E/A)i,_{t+1}+τi,_{t+1},

where yi,t =1 if the company is a payer and zero otherwise. In addition, TSEP means Tokyo Stock Exchange (TSE) First Section market

capitalization percentile, that is, the percentage of firms on the TSE First Section having smaller capitalization than firm i in that year,

M/B denotes the market-to-book ratio, dA/A is the total asset growth ratio, and E/A denotes the after-tax earnings-to-total-asset ratio.

** denotes the statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at
the 5% level, respectively.

**Table 4.** Cross-sectional Determinants on One-year-ahead Dividend Payments.

TSEPt |
M/B t |
dA/A t |
E/A t |
N |
McFadden R-squared | |
---|---|---|---|---|---|---|

1986 | 0.066*[0.037] | 0.227[0.054] | 97 | 0.379 | ||

2.155[0.187] | 0.301*[0.019] | 97 | 0.272 | |||

0.010*[0.013] | 0.327*[0.013] | 97 | 0.228 | |||

1987 | 0.071*[0.016] | 0.551**[0.007] | 103 | 0.559 | ||

1.711[0.286] | 0.616**[0.004] | 103 | 0.433 | |||

0.026[0.501] | 0.616**[0.005] | 103 | 0.421 | |||

1988 | 0.027[0.271] | 2.325**[0.004] | 105 | 0.616 | ||

−0.363[0.796] | 2.680**[0.001] | 105 | 0.596 | |||

0.231[0.081] | 2.457**[0.004] | 105 | 0.684 | |||

1989 | 0.034[0.078] | 0.545*[0.025] | 107 | 0.306 | ||

−0.644[0.314] | 0.761**[0.008] | 107 | 0.256 | |||

0.014[0.718] | 0.674*[0.013] | 107 | 0.245 | |||

1990 | −0.0001[0.995] | 0.704*[0.044] | 109 | 0.353 | ||

−1.537[0.092] | 0.885[0.093] | 109 | 0.424 | |||

0.008[0.851] | 0.730*[0.038] | 109 | 0.353 | |||

1991 | 0.057[0.054] | 0.206[0.509] | 113 | 0.210 | ||

2.109[0.235] | 0.302[0.401] | 113 | 0.113 | |||

−0.013[0.199] | 0.391[0.239] | 113 | 0.172 | |||

1992 | 0.033[0.069] | 0.250*[0.011] | 118 | 0.324 | ||

−2.879*[0.014] | 0.428**[0.000] | 118 | 0.362 | |||

0.017[0.772] | 0.292*[0.014] | 118 | 0.266 | |||

1993 | 0.021[0.110] | 0.362**[0.000] | 119 | 0.432 | ||

−1.54[0.167] | 0.461**[0.000] | 119 | 0.423 | |||

0.002[0.977] | 0.405**[0.000] | 119 | 0.407 | |||

1994 | 0.023[0.057] | 0.745**[0.000] | 119 | 0.466 | ||

−0.436[0.546] | 0.891**[0.000] | 119 | 0.440 | |||

0.003[0.929] | 0.868**[0.000] | 119 | 0.437 | |||

1995 | 0.029**[0.005] | 0.339**[0.010] | 121 | 0.247 | ||

−1.342[0.091] | 0.552**[0.000] | 121 | 0.205 | |||

−0.036[0.187] | 0.497**[0.000] | 121 | 0.189 | |||

1996 | 0.042**[0.001] | 0.638**[0.000] | 123 | 0.383 | ||

−0.622[0.479] | 0.594**[0.000] | 123 | 0.270 | |||

−0.042[0.136] | 0.690**[0.000] | 123 | 0.282 | |||

1997 | 0.046**[0.001] | 0.330**[0.004] | 129 | 0.317 | ||

−0.192[0.754] | 0.434**[0.000] | 129 | 0.177 | |||

0.055[0.145] | 0.410**[0.000] | 129 | 0.198 | |||

1998 | 0.066**[0.000] | 0.110[0.317] | 134 | 0.328 | ||

−0.088[0.919] | 0.345**[0.004] | 134 | 0.131 | |||

0.006[0.899] | 0.334**[0.002] | 134 | 0.131 | |||

1999 | 0.031**[0.007] | 0.299**[0.000] | 138 | 0.380 | ||

0.201[0.773] | 0.327**[0.000] | 138 | 0.318 | |||

0.084[0.060] | 0.288**[0.000] | 138 | 0.344 | |||

2000 | 0.028**[0.003] | 0.092[0.052] | 144 | 0.196 | ||

1.021[0.052] | 0.083[0.062] | 144 | 0.174 | |||

0.144**[0.002] | 0.046[0.429] | 144 | 0.228 | |||

2001 | 0.042**[0.007] | 0.201**[0.001] | 153 | 0.437 | ||

1.068[0.295] | 0.238**[0.000] | 153 | 0.371 | |||

0.077*[0.026] | 0.240**[0.001] | 153 | 0.405 | |||

2002 | 0.026**[0.000] | −0.0002[0.933] | 153 | 0.083 | ||

−0.065[0.717] | 0.001[0.888] | 153 | 0.001 | |||

0.056**[0.004] | 0.002[0.569] | 153 | 0.054 | |||

2003 | 0.023**[0.005] | 0.269**[0.000] | 150 | 0.252 | ||

0.854[0.192] | 0.279**[0.000] | 150 | 0.213 | |||

0.068*[0.036] | 0.262**[0.000] | 150 | 0.230 | |||

2004 | 0.033**[0.005] | 0.332**[0.002] | 151 | 0.318 | ||

−0.253[0.199] | 0.403**[0.000] | 151 | 0.250 | |||

−0.003[0.120] | 0.385**[0.001] | 151 | 0.262 | |||

2005 | 0.031*[0.013] | 0.383**[0.002] | 162 | 0.297 | ||

−0.413[0.446] | 0.362**[0.002] | 162 | 0.231 | |||

−0.016[0.197] | 0.352**[0.004] | 162 | 0.277 | |||

2006 | 0.016[0.133] | 0.308**[0.000] | 165 | 0.317 | ||

−0.462[0.182] | 0.333**[0.000] | 165 | 0.310 | |||

0.023[0.500] | 0.286**[0.000] | 165 | 0.301 |

**Notes: **Cross-sectional logit models are estimated. For example, the estimated logit model is as follows:

*y**i*,*t*=*α*+*ϑ _{1}TSEP*

where

**Table 5.** Cross-sectional Determinants on Dividend Payments: The Contemporaneous Relations.

TSEP_{t+1} |
M/B _{t+1} |
dA/A _{t+1} |
E/A _{t+1} |
N |
McFadden R-squared | |
---|---|---|---|---|---|---|

1986 | 0.068*[0.035] | 0.218*[0.044] | 103 | 0.422 | ||

2.912[0.137] | 0.272*[0.011] | 103 | 0.322 | |||

−0.046[0.173] | 0.346**[0.004] | 103 | 0.299 | |||

1987 | 0.063*[0.024] | 1.395**[0.004] | 105 | 0.564 | ||

0.742[0.547] | 1.799**[0.001] | 105 | 0.462 | |||

0.117[0.114] | 1.535**[0.003] | 105 | 0.507 | |||

1988 | 0.039*[0.028] | 0.436*[0.039] | 105 | 0.279 | ||

−0.141[0.843] | 0.590*[0.012] | 105 | 0.188 | |||

0.036[0.346] | 0.529*[0.021] | 105 | 0.201 | |||

1989 | 0.021[0.202] | 0.365*[0.046] | 107 | 0.197 | ||

−1.235*[0.045] | 0.586[0.052] | 107 | 0.241 | |||

0.007[0.803] | 0.465*[0.023] | 107 | 0.169 | |||

1990 | 0.043[0.062] | −0.052[0.859] | 109 | 0.126 | ||

1.557[0.330] | 0.031[0.926] | 109 | 0.041 | |||

−0.019[0.363] | 0.044[0.884] | 109 | 0.155 | |||

1991 | 0.032[0.147] | 0.044[0.399] | 113 | 0.232 | ||

−1.569[0.142] | 0.143[0.224] | 113 | 0.187 | |||

0.032[0.684] | 0.062[0.689] | 113 | 0.176 | |||

1992 | 0.053*[0.015] | 0.092[0.138] | 118 | 0.320 | ||

−1.756[0.090] | 0.177**[0.002] | 118 | 0.222 | |||

−0.047[0.392] | 0.186**[0.009] | 118 | 0.195 | |||

1993 | 0.026*[0.022] | 0.252**[0.006] | 118 | 0.231 | ||

−0.711[0.210] | 0.370**[0.000] | 118 | .0.191 | |||

−0.016[0.612] | 0.356**[0.001] | 118 | 0.180 | |||

1994 | 0.028**[0.005] | 0.417**[0.003] | 119 | 0.267 | ||

−1.217[0.125] | 0.620**[0.000] | 119 | 0.225 | |||

−0.024[0.399] | 0.554**[0.000] | 119 | 0.207 | |||

1995 | 0.030**[0.001] | 0.118[0.083] | 122 | 0.153 | ||

−0.395[0.418] | 0.163*[0.011] | 122 | 0.064 | |||

−0.003[0.901] | 0.161*[0.019] | 122 | 0.059 | |||

1996 | 0.037**[0.001] | 0.214*[0.028] | 123 | 0.226 | ||

−0.156[0.771] | 0.317**[0.001] | 123 | 0.108 | |||

−0.018[0.341] | 0.325**[0.001] | 123 | 0.114 | |||

1997 | 0.039**[0.002] | 0.175[0.110] | 129 | 0.241 | ||

−0.031[0.970] | 0.349**[0.003] | 129 | 0.133 | |||

−0.027[0.516] | 0.372**[0.001] | 129 | 0.137 | |||

1998 | 0.053**[0.001] | 0.092[0.076] | 134 | 0.304 | ||

−0.132[0.792] | 0.176**[0.001] | 134 | 0.151 | |||

0.061[0.172] | 0.131*[0.017] | 134 | 0.168 | |||

1999 | 0.036**[0.000] | 0.048[0.253] | 136 | 0.215 | ||

0.771[0.072] | 0.056[0.088] | 136 | 0.139 | |||

0.096*[0.013] | 0.028[0.559] | 136 | 0.155 | |||

2000 | 0.023*[0.025] | 0.097*[0.022] | 140 | 0.211 | ||

0.984[0.142] | 0.116**[0.003] | 140 | 0.188 | |||

0.039[0.151] | 0.112*[0.012] | 140 | 0.187 | |||

2001 | 0.069**[0.000] | −0.001[0.618] | 151 | 0.293 | ||

−0.324[0.101] | 0.006[0.313] | 151 | 0.029 | |||

0.071**[0.004] | 0.001[0.824] | 151 | 0.089 | |||

2002 | 0.016*[0.030] | 0.077[0.083] | 146 | 0.082 | ||

0.418[0.064] | 0.105**[0.005] | 146 | 0.064 | |||

0.032[0.245] | 0.082[0.073] | 146 | 0.060 | |||

2003 | 0.020*[0.011] | 0.126*[0.020] | 145 | 0.114 | ||

−0.078[0.671] | 0.153**[0.008] | 145 | 0.071 | |||

−0.003[0.339] | 0.153**[0.007] | 145 | 0.084 | |||

2004 | 0.032**[0.002] | 0.130[0.085] | 151 | 0.188 | ||

−0.201[0.653] | 0.146*[0.040] | 151 | 0.095 | |||

−0.007[0.226] | 0.136*[0.030] | 151 | 0.107 | |||

2005 | 0.024*[0.019] | 0.126*[0.016] | 162 | 0.128 | ||

−0.210[0.596] | 0.142**[0.007] | 162 | 0.070 | |||

0.041[0.241] | 0.098[0.077] | 162 | 0.083 |

yi,t=α+ϑ_{1}TSEPi,_{t+1}+ϑ_{2} (M/B)i,_{t+1}+ϑ_{3}(dA/A)i,_{t+1}+ϑ_{4}(E/A)i, _{t+1}+τi,_{t+1},

where yi,t =1 if the company is a payer and zero otherwise. In addition, TSEP means Tokyo Stock Exchange (TSE) First Section market

capitalization percentile, that is, the percentage of firms on the TSE First Section having smaller capitalization than firm i in that year,

M/B denotes the market-to-book ratio, dA/A is the total asset growth ratio, and E/A denotes the after-tax earnings-to-total-asset ratio.

** denotes the statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at
the 5% level, respectively.

**Table 6.** Cross-sectional Characteristics of One-year-after Dividend Payments.

Next, **Table 5** presents the results of logit models such as (8) and indicates that the after-tax earnings-to-total-asset ratio is
statistically significant and strongly positive in general. Hence, this table indicates that the relation between earnings and dividend
payments are also strong in the year they pay dividends.

Finally, **Table 6** shows the results of logit models such as (10) and indicates that the after-tax earnings-to-total-asset ratio is again
statistically significant and positive in general; however, the significance seems to be lower than in **Tables 4 and 5**. Therefore, payers’
earnings are also high in the year after they pay dividends; however, their financial conditions might be weaker than in the previous
two years.

In order to check the earnings situations in more detail, we consider the p-values of the coefficients of the E/As in models (8) to (10)
in **Figure 1**, which plots the average p-values from three kinds of logit models in each year. As smaller p-values are more favorable,
earnings conditions are best in the year before they pay dividends, second best in the year they are payers, and worst in the year after they pay dividends in these three cases. From these results, on a cross-sectional basis, we find that the relation between
earnings and dividend payments observed in the Japanese electrical appliances industry weakens in the year after payment of
dividends.

Average p-values of the coefficients of E/A from three kinds of logit models are plotted from 1986 to 2006. For example, for deriving p-values as to
the contemporaneous relations between corporate dividend payments and the after-tax earnings-to-total-asset ratios, the three estimated models
are as follows: (1) *y _{i,t}=α+ϑ_{1}TSEP_{i,t}+ϑ_{2}(E/A)_{i,t}+τ_{i,t}, (2) y_{i,t}=α+ϑ_{1}(M/B)_{i,t}+ϑ_{2}(E/A)_{i,t}+τ_{i,t}, and (3) y_{i,t}=α+ϑ_{1}(dA/A)_{i,t}+ϑ_{2}(E/A)_{i,t}+τ_{i,t}.*

**Aggregate Time-series Tests**

In this section, we additionally examine the dividend policy of the Japanese electrical appliances industry on an aggregate time-series basis. More precisely, we perform alternative intertemporal tests using the following kinds of models; namely, for example, for Initiate:

and, for Continue:

where VWP^{D−ND} is the book value-weighted dividend premium, VWNonpayerM/B (VWPayerM/B) is the book value-weighted
nonpayers’ (payers’) market-to-book ratios, VWD/P denotes the book value-weighted dividend yields, VWSIZE is the book valueweighted
market capitalization, VWNonpayerSIZE (VWPayerSIZE) is the book value-weighted nonpayers’ (payers’) market
capitalizations, VWE/A is the book value-weighted after-tax earnings-to-total-asset ratios, VWNonpayerE/A (VWPayerE/A) is the book
value-weighted nonpayers’ (payers’) after-tax earnings-to-total-asset ratios, Year is the time trend variable, and Tax denotes the ratio
of after-tax income from dividends relative to after-tax income from capital gains. Hence, the variable Tax measures the favorability
of dividends in comparison with capital gains from the viewpoint of the Japanese tax system.

**Tables 7 to 9** display the results of various regressions. **Table 7** shows the relations between dividend payments and the previous
year’s corporate results, **Table 8** indicates the contemporaneous relations between dividend payments and corporate results, and **Table 9** shows the relations between dividend payments and the following year’s corporate results.

Panel A: Initiatet D−NDVW P _{t−1} 4.96 |
||||||||
---|---|---|---|---|---|---|---|---|

[0.22] | ||||||||

VW Nonpayer M/B_{t−1} |
5.18 | |||||||

[0.11] | ||||||||

VW D/P_{t−1} |
−8.66** | −7.37** | ||||||

[0.00] | [0.01] | |||||||

VW SIZE_{t−1} |
4.59 | |||||||

[0.10] | ||||||||

VW Nonpayer SIZE_{t−1} |
4.02** | 2.17 | ||||||

[0.01] | [0.23] | |||||||

VW E/A_{t−1} |
−3.34 | |||||||

[0.44] | ||||||||

VW Nonpayer E/A _{t−1} |
4.38* | 2.26 | ||||||

[0.02] | [0.41] | |||||||

Tax _{t−1} |
9.10 | 1.81 | 8.24 | 6.65 | 5.53 | 6.79 | 3.55 | 7.65 |

[0.16] | [0.77] | [0.12] | [0.14] | [0.31] | [0.36] | [0.36] | [0.12] | |

Year _{t−1} |
−0.71 | 1.10 | −0.41 | −0.20 | −0.13 | −0.30 | 0.43 | −0.44 |

[0.62] | [0.33] | [0.62] | [0.83] | [0.90] | [0.85] | [0.60] | [0.59] | |

N |
20 | 20 | 20 | 20 | 20 | 20 | 20 | 20 |

Adj.R^{2} |
0.04 | 0.07 | 0.38 | 0.08 | 0.05 | 0.02 | 0.09 | 0.32 |

Panel B: Continuet D−NDVW P _{t−1} 0.69 |
||||||||

[0.50] | ||||||||

VW Payer M/B_{t−1} |
1.26 | 1.97 | ||||||

[0.08] | [0.41] | |||||||

VW D/P_{t−1} |
−1.93* | −3.01* | ||||||

[0.02] | [0.02] | |||||||

VW SIZE_{t−1} |
4.59 | −3.77* | ||||||

[0.10] | [0.04] | |||||||

VW Payer SIZE_{t−1} |
0.71 | |||||||

[0.27] | ||||||||

VW E/A_{t−1} |
−3.34 | |||||||

[0.44] | ||||||||

VW Payer E/A_{t−1} |
−0.66 | |||||||

[0.66] | ||||||||

Tax _{t−1} |
3.20 | 3.15* | 3.38 | 6.65 | 2.91 | 6.79 | 3.03 | 3.06 |

[0.06] | [0.05] | [0.09] | [0.14] | [0.07] | [0.36] | [0.22] | [0.08] | |

Year _{t−1} |
−0.60 | −0.50 | −0.61 | −0.20 | −0.54* | −0.30 | −0.58 | −0.37 |

[0.06] | [0.07] | [0.06] | [0.83] | [0.02] | [0.85] | [0.25] | [0.25] | |

N |
20 | 20 | 20 | 20 | 20 | 20 | 20 | 20 |

Adj.R^{2} |
0.06 | 0.14 | 0.27 | 0.08 | 0.07 | 0.02 | 0.06 | 0.35 |

Notes: Several regressions of dividend payment rates on measures of the dividend premium and other nominated variables are

performed. For example, the initiation rate is modeled in Panel A as:

Initiatet=α+ϑ_{1}VWPD−ND

_{t+1}+ϑ_{2}VWNonpayerM/B _{t+1}+ϑ_{3}VWD/P _{t+1}+ϑ_{4}VWSIZE _{t+1} +ϑ_{5}VWNonpayerSIZE _{t+1}+ϑ_{6}VWE/A _{t+1}+ϑ_{7}VWNonpayerE/A _{t+1}+ϑ_{8}Tax _{t+1}+ϑ_{9}Year _{t+1}+τ_{t+1}.

The initiation rate Initiate expresses payers as a percentage of surviving nonpayers from t −1. The continuation rate Continue expresses

payers as a percentage of surviving payers from t −1. All independent variables but Year are standardized to unit variance. p-values are

derived by the method of Newey and West [46], thus they are robust to heteroskedasticity and serial correlation. ** denotes the

statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at the 5% level,

respectively. N is the number of sample and Adj. R2 is the adjusted R-squared value.

**Table 7.** One-year-ahead Time-series Determinants on Dividend Payments.

Panel A: Initiatet VW P tD−ND0.35 |
||||||||
---|---|---|---|---|---|---|---|---|

[0.93] | ||||||||

VW Nonpayer M/Bt |
9.48** | 7.81** | ||||||

[0.00] | [0.00] | |||||||

VW D/Pt |
−6.66 | |||||||

[0.06] | ||||||||

VW SIZEt |
7.58* | |||||||

[0.04] | ||||||||

VW Nonpayer SIZEt |
−6.65** | |||||||

[0.00] | ||||||||

VW E/At |
11.12** | 9.66** | ||||||

[0.00] | [0.00] | |||||||

VW Nonpayer E/At |
6.27** | |||||||

[0.00] | ||||||||

Tax t |
8.05* | 2.60 | 11.07** | 11.27** | 6.53 | −0.84 | 6.58 | −3.95 |

[0.03] | [0.61] | [0.01] | [0.01] | [0.16] | [0.85] | [0.10] | [0.37] | |

Year t |
−0.18 | 1.42 | −0.56 | −0.85 | 0.59 | 1.63 | 0.16 | 2.66** |

[0.80] | [0.13] | [0.39] | [0.17] | [0.61] | [0.11] | [0.83] | [0.01] | |

N |
20 | 20 | 20 | 20 | 20 | 20 | 20 | 20 |

Adj.R^{2} |
0.07 | 0.37 | 0.28 | 0.32 | 0.26 | 0.45 | 0.29 | 0.62 |

Panel B: Continuet VW P tD−ND0.36 |
||||||||

[0.72] | ||||||||

VW Payer M/Bt |
1.07 | |||||||

[0.14] | ||||||||

VW D/Pt |
0.003 | |||||||

[0.10] | ||||||||

VW SIZEt |
1.44 | |||||||

[0.07] | ||||||||

VW Payer SIZEt |
1.18 | |||||||

[0.11] | ||||||||

VW E/At |
4.69** | |||||||

[0.00] | ||||||||

VW Payer E/At |
4.54** | |||||||

[0.00] | ||||||||

Tax t |
2.68 | 2.80* | 2.36* | 3.04* | 2.95* | −1.25* | −1.53* | |

[0.11] | [0.04] | [0.04] | [0.05] | [0.05] | [0.02] | [0.03] | ||

Year t |
−0.51 | −0.47* | −0.44* | −0.58* | −0.57* | 0.29* | 0.27 | |

[0.15] | [0.04] | [0.04] | [0.03] | [0.04] | [0.02] | [0.08] | ||

N |
20 | 20 | 20 | 20 | 20 | 20 | 20 | |

Adj.R^{2} |
0.02 | 0.09 | 0.02 | 0.08 | 0.09 | 0.80 | 0.72 |

**Notes: **Several regressions of dividend payment rates on measures of the dividend premium and other nominated variables are performed. For example, the initiation rate is modeled in Panel A as:

*Initiate**t**=α+ϑ _{1}VWP*

The initiation rate

**Table 8.** Contemporaneous Time-series Determinants on Dividend Payments.

Panel A: Initiatet D−NDVW P _{t+1}−1.70 |
|||||||
---|---|---|---|---|---|---|---|

[0.80] | |||||||

VW Nonpayer M/B_{t+1} |
5.95 | ||||||

[0.27] | |||||||

VW D/P _{t+1} |
−3.70 | ||||||

[0.12] | |||||||

VW SIZE_{t+1} |
4.27 | ||||||

[0.39] | |||||||

VW Nonpayer SIZE_{t+1} |
0.50 | ||||||

[0.84] | |||||||

VW E/A_{t+1} |
4.55 | ||||||

[0.37] | |||||||

VW Nonpayer E/A_{t+1} |
0.17 | ||||||

[0.94] | |||||||

Tax _{t+1} |
2.08 | 0.70 | 5.59 | 5.99 | 3.59 | −0.05 | 3.48 |

[0.85] | [0.93] | [0.37] | [0.37] | [0.59] | [0.99] | [0.60] | |

Year _{t+1} |
0.91 | 1.55 | 0.33 | 0.18 | 0.52 | 1.28 | 0.58 |

[0.68] | [0.37] | [0.71] | [0.86] | [0.62] | [0.21] | [0.54] | |

N |
19 | 19 | 19 | 19 | 19 | 19 | 19 |

Adj.R^{2} |
−0.02 | 0.09 | 0.04 | 0.05 | −0.03 | 0.04 | −0.03 |

Panel B: Continuet D−NDVW P _{t+1}−2.72 |
|||||||

[0.14] | |||||||

VW Payer M/B_{t+1} |
0.17 | ||||||

[0.89] | |||||||

VW D/P_{t+1} |
0.06 | ||||||

[0.95] | |||||||

VW SIZE_{t+1} |
0.50 | ||||||

[0.76] | |||||||

VW Payer SIZE_{t+1} |
0.21 | ||||||

[0.90] | |||||||

VW E/A_{t+1} |
2.07 | ||||||

[0.12] | |||||||

VW Payer E/A_{t+1} |
2.16 | ||||||

[0.12] | |||||||

Tax _{t+1} |
−2.81 | −0.47 | −0.57 | −0.25 | −0.42 | −2.16 | −2.43 |

[0.33] | [0.82] | [0.78] | [0.90] | [0.84] | [0.34] | [0.29] | |

Year _{t+1} |
0.41 | −0.14 | −0.13 | −0.18 | −0.16 | −0.19 | 0.20 |

[0.43] | [0.48] | [0.55] | [0.35] | [0.48] | [0.54] | [0.52] | |

N |
19 | 19 | 19 | 19 | 19 | 19 | 19 |

Adj.R^{2} |
0.07 | −0.12 | −0.13 | −0.11 | −0.12 | 0.03 | 0.04 |

**Notes: **Several regressions of dividend payment rates on measures of the dividend premium and other nominated variables are performed. For example, the initiation rate is modeled in Panel A as:

*Initiate**t**=α+ϑ _{1}VWP*

The initiation rate

respectively.

**Table 9.** One-year-after Time-series Determinants on Dividend Payments.

The tests in **Tables 7 to 9** are extensions of BW [2] and explore comprehensively the determinants of dividend payments. First, panel
A of **Table 7** indicates that dividend yields, nonpayers’ size and earnings in the previous year are statistically significant determinants
of the dividend initiations. Furthermore, panel B of Table 7 shows that the dividend yield in the previous year is a statistically
significant determinant of dividend continuations.

Second, panel A of **Table 8** indicates that nonpayers’ M/B, average size of all companies, and nonpayers’ earnings in the current year
are statistically significant determinants of dividend initiations. Furthermore, panel B of **Table 8** shows that all companies’ and payers’
earnings in the current year are statistically significant determinants of dividend continuations. Hence, **Table 8** demonstrates that
corporate earnings and dividend payments are most strongly related in the same period.

Third, panel A of **Table 9** indicates that no aggregate variables in the following period are statistically significant determinants of
dividend initiations. We should note that this evidence that the earnings ratios in the next year are not related to dividend initiation
behavior means a rejection of the signaling hypothesis in the Japanese electrical appliances industry. Furthermore, panel B of **Table 9** shows that no aggregate variables in the following year are statistically significant determinants of dividend continuations.

The above results mean that for aggregate time series, dividend premiums are not determinants of dividend payments if we take into account the intertemporal relations. Hence, in the Japanese electrical appliances industry, catering behavior among financial managers towards investors’ demands for dividends is not evident. From an aggregate time-series viewpoint, in the year following dividend initiations and continuations, corporate earnings are not significant; thus, the signaling hypothesis cannot be supported on an aggregate time-series basis for the Japanese electrical appliances industry.

This paper explored the determinants of dividend initiations and continuations from the perspectives of catering theory and the signaling hypothesis in the Japanese electrical appliances industry. We found interesting new evidence as follows.

(1) First, with regard to the dividend initiations and continuations of Japanese electrical appliances industry firms, the dividend premium is not a determinant. This means that firms in the electrical appliances industry in Japan do not behave as predicted by catering theory.

(2) Instead, in contrast to the US case, regarding dividend initiations, value-weighted dividend yields, value-weighted nonpayers’ size, and value-weighted after-tax earnings-to-total-asset ratios are the determinants of one-year-ahead dividend initiations in Japanese electrical appliances industry firms. These are new results obtained by extending the study of BW [2].

(3) From the cross-sectional viewpoint, we generally support the relationship between corporate earnings and dividend payments; however, from the aggregate time-series viewpoint, we find that corporate earnings tend to decrease in the year following dividend payments by Japanese electrical appliances industry firms; this means a rejection of the signaling hypothesis.

As above, the new evidence derived in this paper contributes to the important issue of dividend policy in corporate finance. Future related academic studies using large Japanese datasets will be valuable. These studies may lead to stronger and more comprehensive conclusions, and this is our future task.

The author declares that he has no competing interests.

The initiation rate Initiate expresses payers as a percentage of surviving nonpayers from t −1. The continuation rate Continue expresses payers as a percentage of surviving payers from t −1. All independent variables but Year are standardized to unit variance. p-values are derived by the method of Newey and West [46], thus they are robust to heteroskedasticity and serial correlation. ** denotes the statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at the 5% level, respectively. N is the number of sample and Adj. R2 is the adjusted R-squared value.

The initiation rate Initiate expresses payers as a percentage of surviving nonpayers from t −1. The continuation rate Continue expresses payers as a percentage of surviving payers from t −1. All independent variables but Year are standardized to unit variance. p-values are derived by the method of Newey and West [46], thus they are robust to heteroskedasticity and serial correlation. ** denotes the statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at the 5% level, respectively. N is the number of sample and Adj. R2 is the adjusted R-squared value.

The initiation rate Initiate expresses payers as a percentage of surviving nonpayers from t −1. The continuation rate Continue expresses payers as a percentage of surviving payers from t −1. All independent variables but Year are standardized to unit variance. p-values are derived by the method of Newey and West [46], thus they are robust to heteroskedasticity and serial correlation. ** denotes the statistical significant of the coefficients at the 1% level, and * denotes the statistical significance of the coefficients at the 5% level, respectively. N is the number of sample and Adj. R2 is the adjusted R-squared value.

I thank the Japan Society for the Promotion of Science, the Zengin Foundation for Studies on Economics and Finance, and Nihon Housei Gakkai for their generous financial assistance for this research.

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