Sticky Dividends: A Behavioral Perspective
John Lintner's study of how firms decide how much to pay in dividends was done more than 50 years ago but the findings have had had remarkable durability. His basic conclusions- that firms set target payout ratios, that dividends lag earnings and that dividend changes are infrequence- still characterize how most companies set dividends. Given the volatility in earnings and cash flows at firms, it seems surprising that dividends do not reflect that volatility and that firms do not actively reassess how much they should pay in dividends.
Cyert and March provide an explanation for the Lintner findings, grounded in what they call "uncertainty avoidance".4 They argue that managers attempt to avoid anticipating or forecasting future events by using decision rules that emphasize short- term feedback from the economic environment. Put another way, firms adopt standardized rules that do not eliminate uncertainty but make dealing with it more tractable. In the context of dividend policy, their model predicts that managers will
a. Set a level of dividends (payout ratios) by looking at industry norms
b. Focus on changes in dividends in response to changes in earnings.
c. Use simple rules of thumb on how to adjust dividends, such as raising dividends only if earnings increase 30% or more.
d. Avoid adjusting dividends in response to changes in stockholder attitudes, if these changes are viewed as short-term changes.
These predictions are well in line with the findings in the Lintner study.