Does a Dividend Ratchet Effect Exist at the Firm Level?
The ratchet effect implies that there is a long-term target dividend payout ratio. We explore the significance of the "œratchet effect" at the firm level. Using cross-sectional analysis of U.S. firms from 1962-2012, we examine the relationship of deviations from target dividend payout ratios with future changes in earnings and future changes in dividends. We find that when the current payout ratio is below the long-term target payout ratio, earnings growth remains stable while dividend growth increases. Conversely, when the current payout ratio is above the long-term target payout ratio, earnings growth increases and dividends growth decreases. Additionally, positive payout ratio deviations signal higher future earnings growth for up to 5 years.
Wann, Christi R., and Jeffrey S. Jones. Does a Dividend Ratchet Effect Exist at the Firm Level?." Banking & Finance Review 6 (2014)."
Finance and General Business