An empirical investigation of the dividend decision in Irish companies
This thesis investigates corporate Ireland's attitude to dividend payments and examines how the Irish stock market reacts to company announcements about dividends. Prior to this study, the attitude of company executives and investors to dividend policy in Ireland was not reported in the academic literature in a systematic fashion. A number of small studies on the topic had been undertaken but the findings of those studies are relatively old and the perspective adopted limited.In the mid-1980s, company managers in the US and the UK aggressively altered dividend policy because the disadvantageous income tax rates to which dividends were subject meant that paying dividends was not an efficient way to return money to shareholders(Campbell, 2003). The double taxation of cash dividends was the primary motivation behind the decision of corporations to repurchase their own shares rather than implementing or increasing dividend payouts (Wood, 2002). In addition, for much of the 1990s dividends seemed unimportant to company executives and investors, as much of the share valuation analysis undertaken by financial commentators, appeared to focus on top line and bottom line growth rather than expectations about periodic dividend distributions (Goodbody, 2003).However, dividends have recently become more important as growth rates in earnings have declined (Jones, 2004).The Irish economy has changed dramatically over the last decade with greater wealth,increased numbers at work and an ageing population (E. S. R. I., 2003). In this new environment, Irish dividend distributions, and more specifically the taxation treatment of those distributions, is an increasingly important issue for Irish economic policy makers as they seek to encourage companies to re-invest their profits for the long-term and to provide incentives to individuals to increase savings and provide for retirement. In this new environment, Irish dividend distributions, and more specifically the taxation treatment of those distributions, is an increasingly important issue for Irish economic policy makers as they seek to encourage companies to re-invest their profits for the long-term and to provide incentives to individuals to increase savings and provide for retirement.The current research finds that dividend policy matters to Irish investors.Specifically,Irish investors appear to react to a dividend announcement as if that announcement conveys important news about the future prospects for the firm. This reaction was very pronounced on the dividend announcement date. Irish firms support the suggestion that dividend policy affects share valuations. In particular, quoted firms believe they know the nature of their shareholder base, and perceive that Irish investors discriminate, according to their tax status, between those companies which pay dividends and those which do not, when selecting securities for their portfolios. In addition, Irish quoted companies follow a policy in which dividend reductions are anathema and an increased dividend will only be declared if management are convinced that the new dividend level can be maintained.Finally, for unquoted firms, dividend policy is strongly driven by the taxation status of their owner shareholders. Tax advisors play a key role in determining dividend policy for such companies and a case can be made for re-examining the inflexibility of Irish tax rules on dividends, particularly for those relating to small and medium-sized companies. The findings represent a contribution to understanding as to why Irish firms pay dividends. In particular, the findings relate to a recent period for Ireland where little evidence exists. In addition, the findings emerge from a comprehensive investigation of the topic using a large-scale sample questionnaire, an event study and a sizable number of interviews. The focus of the investigation is also novel in that the views of unquoted company executives are sought in addition to the perspectives of managers from listed companies. What emerges is a comprehensive investigation of the dividend decisions of Irish companies.
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