How Norwegian Managers View Dividend Policy

University of New Orleans University of New Orleans

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Department of Economics and Finance Working

Papers, 1991-2006

Department of Economics and Finance

2005

How Norwegian Managers View Dividend Policy How Norwegian Managers View Dividend Policy

H. Kent Baker

American University

Tarun K. Mukherjee

University of New Orleans

Ohannes George Pakelian

University of New Orleans

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Recommended Citation Recommended Citation

Baker, H. Kent; Mukherjee, Tarun K.; and Pakelian, Ohannes George, "How Norwegian Managers View

Dividend Policy" (2005).

Department of Economics and Finance Working Papers, 1991-2006.

Paper 48.

https://scholarworks.uno.edu/econ_wp/48

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How Norwegian Managers View Dividend Policy

H. Kent Baker*

University Professor of Finance

American University

Tarun K. Mukherjee

James Moffett Chair in Financial Economics

University of New Orleans

Ohannes George Paskelian

University of New Orleans

JEL classification: G35

Keywords: Dividend policy; cash dividends

December 7, 2005

*Corresponding author: H. Kent Baker, American University, Kogod School of Business,

Department of Finance and Real Estate, 4400 Massachusetts Avenue, NW, Washington, DC

20016-8044; Tel. (202) 885-1949; Fax (202) 885-1949; email [email protected]

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How Norwegian Managers View Dividend Policy

Abstract

We report the results of a 2004 survey from managers of dividend-paying Norwegian

firms listed on the Oslo Stock Exchange about their views on dividend policy. Specifically, we

identify the most important factors in making dividend policy decisions and managers’ views

about various dividend-related issues. The most important determinants of a firm’s dividend

policy are the level of current and expected future earnings, stability of earnings, current degree

of financial leverage, and liquidity constraints. No significant correlation exists between the

overall rankings of factors influencing dividend policy between Norwegian and U.S. managers.

Norwegian managers express mixed views about whether a firm’s dividend policy affects firm

value. Respondents point to the possible role of dividend policy as a signaling mechanism. No

support exists for the tax-preference explanation for paying dividends.

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How Norwegian Managers View Dividend Policy

1. Introduction

In his classic work, Black (1976) found no convincing explanation of why companies pay

cash dividends to their shareholders. In the three decades since Black first described the

“dividend puzzle”, financial economists have intensely studied the possible role of dividends in

maintaining or increasing corporate values. According to Baker, Powell, and Veit (2002a, p.

255), “despite a voluminous amount of research, we still do not have all the answers to the

dividend puzzle.” That is, we do not have definitive answers on why companies pay dividends

and why investors care about them. Nonetheless, theoretical and empirical studies have

provided many useful insights about dividend policy. Although the various theories of dividend

policy typically take a “one-size-fits-all” approach, evidence suggests that dividend policy may

vary substantially from one firm to another. As Frankfurter and Wood (1997, p. 31) conclude,

dividend policy “… cannot be modeled mathematically and uniformly for all firms at all times.”

Researchers have followed two major paths in trying to explain why firms pay dividends.

The most well traveled path is to develop and test various theories to explain the dividend

puzzle. Some of the earliest research focused on the Miller and Modigliani (1961), hereafter

called M&M, argument for dividend irrelevance. Based on some highly restrictive assumptions

involving perfect capital markets, M&M contend that one dividend policy is as good as another.

Others provide plausible explanations for dividend relevance outside of M&M’s idealized

world of economic theory. Common explanations of dividend relevance involve asymmetric

information (signaling), taxation, and agency costs.

Baker and Wurgler (2004) propose a new

explanation called the “catering theory of dividends.” According to this theory, investor

preferences for dividends may change over time. Managers cater to investors by paying

Lease et al. (2000) provide a useful discussion of these dividend theories and research related to them.

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dividends when investors place a stock premium on payers, and by not paying when investors

prefer non-payers. Each theory has some empirical support but no single theory has emerged

as the dominant explanation.

The second path is to survey managers about their views toward possible reasons

underlying dividend decisions. Lintner (1956) conducted the seminal study about dividend

decisions in the United States. According to Lintner’s model, the best predictors of current

dividends are past dividends and current profits. He finds that firms have long-term target

dividend payout ratios that lead to smoothing of dividend payments over time. His evidence also

shows that managers are reluctant both to announce dividend increases that they may later

have to reverse and to cut dividends temporarily.

Almost 30 years later, Baker, Farrelly, and Edelman (1985) and Farrelly, Baker, and

Edelman (1986) surveyed chief financial officers (CFOs) of NYSE firms from three industry

groups (utilities, manufacturing, and wholesale/retail) to identify the major determinants of

corporate dividend policy. Their evidence shows that the most important factors are the

anticipated level of future earnings, the pattern of past dividends, the availability of cash, and

the desire to maintain or increase the stock price. Similar to the findings of Lintner (1956), they

report that firms try to avoid changing dividend rates that might soon need to be reversed,

maintain an uninterrupted record of dividend payments, have a target payout ratio, and

periodically adjust the payout toward the target. Respondents show strong agreement that

dividends provide a signaling device and the market uses dividend announcements to help

value firm stocks. Finally, they report differences in responses between more regulated (utilities)

and less regulated (manufacturing and wholesale/retail) industry groups.

Numerous dividend surveys involving U.S. firms followed including Baker and Farrelly

(1988), Farrelly and Baker (1989), Pruitt and Gitman (1991), Baker and Powell (1999, 2000),

Baker, Veit, and Powell (2001), and Baker, Powell, and Veit (2002b). Perhaps the most relevant

of these surveys are by Baker and Powell (1999, 2000), who update Baker, Farrelly, and

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Edelman (1985). Their survey of CFOs from NYSE firms reports most respondents believe that

dividend policy affects firm value. Respondents show strong support for the signaling

explanation for dividends. Overall, the views of managers about setting dividend payments are

surprisingly consistent with Lintner’s (1956) findings, especially regarding the concern about

continuity of dividends. Unlike Baker, Farrelly, and Edelman (1985), Baker and Powell (2000)

report few differences among the responses of managers in different industries. They attribute

this finding to changes in the economic and competitive environment for utilities.

Several generalizations emerge from the survey research on dividend policy in the U.S.

First, the most important factors influencing dividend policy seem to be relatively stable over

time and are similar to those identified by Lintner (1956). These factors relate to earnings and

the pattern of past dividends. Second, managers commonly believe that dividend policy affects

value and therefore is relevant. Finally, managers seem to favor the signaling explanation for

paying dividends over others. The evidence using survey research methodology both

complements and provides a check of the purely econometric research on dividends.

The primary purpose of this study is to investigate the views of corporate managers of

Norwegian dividend-paying firms listed on the Oslo Stock Exchange about (1) the determinants

influencing the dividend policies of their firms and (2) theoretical and empirical issues about

dividend policy in general. A secondary purpose is to compare the importance that Norwegian

and U.S. managers attached to the factors influencing dividend policy. Although there are

numerous dividend surveys involving U.S. firms, this is not the case for Norway. We have

purposely chosen to study Norwegian firms’ dividend policies relative to those of U.S. firms

because of the stark differences in government regulations and tax rates between the two

countries. Thus, the main contribution of our study is to provide valuable insights on how

managers of Norwegian firms view dividend policy. Such insights can provide a bridge between

theory and practice.

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The remainder of the paper has the following organization. Section 2 provides a

discussion of a few differences between the environments in Norway and the United States.

Section 3 presents our research questions and empirical predictions. Section 4 explains our

methodology including the sample, survey instrument, testing methodology, and limitations.

Section 5 offers our survey results and Section 6 provides a summary and conclusions.

2. Different Regulatory and Tax Environments

Companies operate under different regulatory environments in Norway and the United

States. Norway’s approach to regulatory standards stems from a centralized government that

heavily regulates business in order to ensure stockholders’ rights. This approach is evident by

government-dominant ownership, which often results in a controlling vote in certain firms and

industries. Although large investors such as the government often characterize the market,

government regulations of Norwegian shareholders prevent any person from holding more than

10% of the outstanding shares. Thus, laws and regulations influence the process of setting

dividend policy. Participation in the stock market by Norwegian citizens has lagged until

recently. The standard for corporate governance applying to Norwegian firms, with and without

the government as a majority shareholder, is set forth with specific guidelines determined by the

Ministry of Trade and Industry and the Ministry of Finance.

The regulatory system in the U.S. differs substantially from that of Norway. The

Securities and Exchange Commission (SEC) and the states in which companies are

incorporated exert certain controls over publicly traded firms. Firms in the U.S. substantially rely

on legal protection of investors provided by various laws and large investors are less prevalent.

Thus, an extensive system of rules protects both large and small shareholders. These legal

rules support a system of active public participation in the stock market. Shleifer and Vishny

(1997) conclude that the legal protection of investors and some form of concentrated ownership

are essential elements of a good corporate governance system.

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The two countries have vastly different economic and tax policies. Norway has moved to

a so-called “dual income tax system” that imposes higher rates on wage income but lower flat

rates on all forms of capital income. Norway has lowered rates on capital income because of

increasingly global tax competition. The marginal personal income tax and social security

contribution rates on gross labor are higher in Norway than in the U.S. In addition, the standard

rate for the value added tax (VAT) in Norway during 2005 is 24%. In the U.S., there is no VAT.

In 2005, the combined corporate income tax rate was higher in the U.S. (39.3%) than in Norway

(28.0%).

The treatment of dividends differs between Norway and the U.S. Norway provides a full

dividend tax credit at the shareholder level for part of the underlying corporate profits tax and

has a flat individual tax rate of 28% on all capital income.

As a result, Norway has the lowest

overall dividend tax rate among the 30 Organization for Economic Cooperation and

Development (OECD) countries. By contrast, before the passage of the Jobs and Growth

Reconciliation Act of 2003, the U.S. had the second highest dividend tax rate in the OECD. The

Act reduced both the maximum personal tax rate on dividend income from 38.6% to 15% and

the top tax rate on capital gains income from 20% to 15%. Thus, this Act lowered the marginal

rate on dividends to that of capital gains, thus reducing but not eliminating the tax problem

involving dividends.

3. Research Questions and Empirical Predictions

The study addresses four major research questions.

1. What are the most important factors influencing the dividend policies of dividend-

paying Norwegian firms?

2. Does the overall importance of the factors influencing dividend policy differ between

Norwegian and U.S. firms?

For a discussion of tax rates among OECD countries, see http://www.oecd.org/document.

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3. Do Norwegian managers believe that dividend policy affects firm value?

4. Do Norwegian managers favor the signaling or tax preference theory as an

explanation for paying dividends?

Accordingly, we advance hypotheses in response to these questions. The first

hypothesis is that the most important factors influencing dividend policy of Norwegian firms

relate to earnings. Earnings and the availability of cash provide the basis for paying dividends.

For example, Lintner’s (1956) behavioral model of dividend policy indicates that changes in

dividends depend on past dividends and current profits. Based on their analysis, Benartzi,

Michaely, and Thaler (1997, p. 1032) conclude that “. . . Lintner’s model of dividends remains

the best description of the dividend setting process available.” Frankfurter and Wood (2003)

also find a positive relation between dividends and current earnings. Although changes in

dividends say something about changes in earnings, uncertainty exists about whether dividends

serve as a leading or lagging indicator of earnings power.

Past surveys involving U.S. firms by Baker, Farrelly, and Edelman (1985), Pruitt and

Gitman (1991), Baker and Powell (2000), and Baker, Veit, and Powell (2001) find that factors

relating to earnings are among the most important in determining dividend policy. For example,

evidence by Pruitt and Gitman suggests that important influences on the amount of dividends

paid are current and past years’ profits, the year-to-year variability of earnings, and the growth

of earnings. Thus, we expect Norwegian managers to base dividend decisions on those

variables found empirically to explain corporate dividend behavior, especially those related to

earnings.

The second hypothesis is that significant differences exist in the overall importance

managers of Norwegian and U.S. firms attach to factors influencing dividend policy. Although

we expect that earnings-related factors rank highly with both Norwegian and U.S. managers, we

anticipate that the correlation between the overall rankings of factors is not statistically

significant at normal levels. Our rationale for this belief stems from the fact that corporations

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operate in different regulatory and tax environments in the two countries. We anticipate that

such differences should manifest themselves in the importance that managers attach to various

determinants of dividend policy. Specifically, we expect that Norwegian managers, compared to

their U.S. counterparts, place greater importance on legal rules and constraints but less concern

about affecting the stock price and providing a false signal to investors. We believe that the

presence of strict government regulations and ownership reduces the role of dividend policy as

a signaling mechanism. Thus, if information asymmetry lessens, the need to use dividends as a

signaling device should decline.

Our third hypothesis concerns the theoretical and empirical issue of the relation between

dividend policy and value. We expect that Norwegian managers will express significantly

positive agreement with the notion that paying dividends affects firm value. Under Miller and

Modigliani’s (1961) assumptions of perfect capital markets, dividend policy is irrelevant.

However, real-world frictions and investor preferences can systematically affect dividend policy

and make it a relevant decision variable. Although debate stills exists about dividend relevance,

survey evidence by Baker and Powell (1999) and Baker, Powell, and Veit (2001) shows that

most of their respondents believe that dividend policy affects firm value. We expect that

Norwegian managers hold a similar view.

Our final hypothesis is that Norwegian managers favor signaling over the tax preference

explanation for paying dividends. According to Miller and Modigliani’s (1961) information content

of dividend (signaling) hypothesis, dividend changes trigger stock returns because they convey

new information about the firm’s future profitability. That is, the use of dividends signals

management’s confidence in the future. Many others such as Miller and Rock (1985) argue that

dividends mitigate information asymmetry between management and shareholders.

Numerous studies document the positive association between dividend changes and

stock returns such as Asquith and Mullins (1986), Kalay and Lowenstein (1986), and Nissim and

Ziv (2001). Other recent studies including DeAngelo, DeAngelo, and Skinner (1996), Benartzi,

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Michaely, and Thaler (1997), and Amihud and Li (2004) cast doubt on the hypothesized relation

between dividend changes and future earnings. By contrast, other recent studies including

Garrett and Priestley (2000) as well as Nissim and Ziv (2001) find evidence that dividend

changes provide information about the level of profitability in subsequent years. In addition,

survey evidence by Baker and Powell (1999) and Baker, Powell, and Veit (2001) shows that

managers of U.S. corporations strongly agree with the signaling explanation for paying

dividends.

The tax preference explanation states that since the tax rate on dividends is typically

higher than on long-term capital gains, investors prefer retention of cash to dividend payments.

Thus, firms should keep dividend payments low if they want to maximize share price. This

explanation should not apply in Norway because there is a flat individual tax rate of 28% on all

capital income. Thus, we expect Norwegian managers to express stronger agreement to

statements involving the signaling versus the tax preference explanation for paying dividends.

4. Methodology and Limitations

In this section, we discuss the sample, survey instrument, testing methodology, and

limitations of this study.

Sample

The Oslo Stock Exchange is part of NOREX, which is the strategic alliance between the

Nordic stock exchanges. The NOREX Alliance is the first stock exchange alliance to implement

a joint system for equity trading and harmonize rules and requirements between the exchanges

with respect to trading and membership. Members of the NOREX Alliance have adopted the

same system for classifying listed companies, called the Global Industry Classification Standard

developed by Morgan Stanley Capital International, Inc.

Starting with 166 companies listed on the Oslo Stock Exchange in 2004, we use the

following screening criteria to develop our sample. First, we exclude subsidiaries of Norwegian

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firms if they have no separate management or headquarters. Second, we eliminate international

firms listed on the exchange if management is outside of Norway. Such firms would be subject

to rules different from Norwegian regulations regarding dividends and tax-related issues. Third,

we require the presence of a physical address in Norway. Fourth, we include firms in which the

majority of the board is Norwegian. Finally, we include companies that issued cash dividends in

the past based on their 2003 annual reports.

We use these criteria to provide a sample consisting of Norwegian firms that recently

paid cash dividends. Using these criteria resulted in 121 firms consisting of a mix of small,

medium, and large-sized firms. The small-sized firms are often involved with information

technology. The large-sized firms typically represent industrials and commercial banks with

state ownership, some of which are a direct result of the Norwegian bank crisis of 1988-1992.

Some large industrials, however, have little or no state ownership such as oil companies. The

four most common industry classifications -- manufacturing, financial services, information

technology, and consulting services -- represent about 66% of the population.

Survey Instrument

We modeled the two-page survey instrument after those developed by Baker, Farrelly,

and Edelman (1985) and Farrelly, Baker, and Edelman (1986) and later modified by Baker and

Powell (1999, 2000). We made only minor modifications to the previous surveys to permit

comparisons with U.S. firms.

For example, the Baker and Powell (2000) study contained 20

factors influencing a firm’s dividend policy, whereas our study includes 22 determinants. We

deleted three of the least important and hence lowest ranked factors and substituted several

determinants that we consider relevant given Norway’s economic and legal environment.

The survey consists of three parts. Part I contains 22 factors influencing dividend policy,

which we refer to later as F1 through F22 to indicate their location in the survey. This part of the

We used a survey instrument based on other previously pre-tested surveys.

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survey asks respondents to indicate the level of importance of each factor in determining their

firm’s dividend policy using a four-point, equal-interval importance scale where 0 = none, 1 =

low, 2 = moderate, and 3 = high. Part II contains six questions about the background of

respondents and their firms. Part III of the survey asks the respondents to indicate their level of

agreement or disagreement with each of 26 closed-end statements based on a five-point

response scale. This equal-interval scale is as follows: -2 = strongly disagree, -1 = disagree, 0 =

no opinion, +1 = agree, and +2 = strongly agree. The 26 statements fall within five areas

involving (1) investor/shareholder preferences, (2) dividend setting process, (3) dividend policy

and value, (4) dividends and signaling, and (5) dividends and taxes. The survey contained a

code number to identify the respondents. As an inducement to respond, we offered an executive

summary of the results. The Appendix contains a copy of the survey.

During April and May 2004, we mailed a cover letter requesting participation in this study

along with a stamped, self-addressed return envelope and the survey instrument to the top

financial officer of the 121 firms. The cover letter informed potential respondents that we would

report the results in summary form and would not disclose any information involving individual

companies. We received 34 surveys of which 33 are usable, giving a response rate of 27.3%.

Respondents answered virtually every question.

The responding firms represent various industries of which the most common industry

type is manufacturing (33.3%) followed by financial services (15.2%). No other industry group

amounts to as much as 10% of the responding firms. We intended to partition firms into financial

Our response rate is slightly lower than reported in recent dividend policy surveys in the U.S. For

example, Baker and Powell (1999 and 2000) report a 32.9% response rate among corporate managers of

NYSE firms. Baker, Veit, and Powell (2001) and Baker, Powell, and Veit (2002b) report a 29.8% response

rate among NASDAQ managers from dividend-paying firms. These studies involved multiple mailings.

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and non-financial firms to test for industry effects, but the sample size precluded our

undertaking this analysis.

Testing Methodology

To test our first hypothesis, we used a t-test to determine whether the importance that

respondents attach to each of the 22 factors influencing dividend policy differs significantly from

zero (no importance) and 1.5 (the theoretical mean of the four-point importance scale).

Comparing the mean for each determinant to 1.5 indicates whether the factor is relatively more

or less important than average (low/moderate importance). In addition, we used a one-sample

chi-square test to determine whether a significant difference exists between an observed

number of responses falling in each category and an expected number based on the null

hypothesis of no difference. To avoid problems associated with inadequate cell size, we

collapsed the four-point importance scale into two categories: none/low importance and

moderate/high importance. We tested to determine whether significant differences exist

between the observed and expected responses.

To test our second hypothesis, we used the Spearman rank correlation coefficient (r

) to

determine whether the factors ranked by Norwegian and U.S. managers differ significantly.

Because the number of factors is equal to or greater than 10, we computed the t-statistic

associated with the value of r

. We used a two-tailed test because we do not predict the

direction of the outcome.

We also used t-tests to test our third and fourth hypotheses. That is, we determined

whether the level of agreement/disagreement that respondents attached to each of the 26

issues involving dividend policy differed significantly from zero (no opinion). Where possible, we

used the chi-square test to determine the significance of the differences among independent

groups.

Limitations

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As with any survey, this study has several potential limitations. One drawback is the

possibility of non-response bias despite taking the normal precautions to reduce this bias such

as by guaranteeing confidentiality and offering a summary of the results to respondents. We

used two tests to investigate whether non-response bias might affect our results. First, we used

the Wilcoxon sign test to compare the median characteristics of the responding firms (sample)

with those of the population. The four characteristics are: (1) total assets, (2) debt ratio (total

debt/total assets), (3) market-to-book ratio, and (4) dividend payout ratio. This test computes the

differences between the population median and each of the sample values, ranks these

differences, and compares them according to the signed differences. Having similar

characteristics between these groups would lessen the concern about whether the responding

firms are representative of the population. No significant differences exist between the

responding firms and the population on any of these characteristics at the 0.05 level.

Next, we used the Spearman rank order correlation coefficient to determine whether an

association exists between the rankings of the 12 industry classifications by size in the sample

and population and then determine whether r

(Spearman’s rho) differs from zero only by

chance. Given that r

is 0.7876 and n is 12, the associated t-value is 4.04 with df = 10, which is

significant at the 0.01 level using a one-tailed test. Hence, we reject the hull hypothesis and

conclude that a significant positive correlation exists between the industry rankings in the

population and sample.

Another potential limitation is that our study addresses only some of the interesting

dividend policy issues. We limited the scope and hence the length of our survey to increase the

response rate and to compare the results with previous dividend studies in the U.S. For

example, our study provides information about how dividend policymakers view certain

The results of the Wilcoxon sign test and the Spearman rank correlation coefficient are available from

the authors upon request.

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determinants and issues involving dividend policy, but it does not provide information about why

the respondents hold these views. This decision to focus on several key areas involving

dividend policy entails a tradeoff between comprehensiveness and the response rate. As the

length and complexity of practitioner surveys increase, the response rate generally declines,

which increases the potential for non-response bias. We believe, however, that justification

exists for the tradeoff in this situation.

Finally, the importance of specific factors and the views about dividend policy in general

could differ by industry group. Research by Michel (1979) and Baker (1988) among others

suggests that a positive relationship exists between industry classification and dividend policy.

Baker and Powell (2000) conclude that industry type appears to influence the importance that

U.S. managers place on some determinants of dividend policy, but some of these differences

have diminished over time. Frankfurter and Wood (2003) find no evidence of a systematic

relationship between dividend policy and industrial classification. They suggest that variations in

dividend policy by industry might be the sole effect of firm size. Given the small number of

responding firms and broad distribution of industry types, we could not partition our sample for

purposes of conducting a meaningful analysis of the relationship, if any, between dividend policy

and industry classification.

5. Empirical Results

We report the survey results in four sub-sections. First, we examine responses to

several questions about the respondents and their firm’s dividend policy. Next, we discuss the

factors influencing dividend policy for Norwegian firms. Third, we compare the results to those

reported by managers of U.S. firms listed on the NYSE and NASDAQ. Finally, we examine the

responses to statements about investor/shareholder preferences, dividend setting process,

dividend policy and value, dividends and signaling, and dividends and taxes. Tables 1 through 7

report our empirical findings.

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Background Information

The survey asks several questions about the characteristics of respondents. The

respondent profile supports our belief that knowledgeable individuals answered the survey,

which, in turn, lends credibility to our results. For example, most respondents (84.8%) indicated

that they are actively involved in determining their firm’s dividend policy. Those respondents not

directly involved in the dividend setting process are generally in investor relations. In addition,

almost all survey respondents hold senior managerial positions. The four most common

positions or titles of the respondents are chief financial officer (57.6%), chief executive officer

(12.1%), investor relations (11.8%), and finance director (9.1%). No other category amounts to

more than 5% of the responses.

The survey also contains several background questions about the firm’s existing

dividend policy. Table 1 displays the responses to three questions about the administration of

dividend policy. As Panel A shows, the most influential person in developing the firm’s dividend

policy is the chief financial officer (54.5%) followed by the chief executive officer (30.3%). As

Panel B indicates, most respondents indicate that their firms (87.9%) formally reexamine

dividend policy annually. As Panel C shows, about three-quarters (75.8%) of the responding

firms do not have an explicit target payout ratio.

We compared the responses to the three questions in Table 1 to those reported by

Baker and Powell (2000) for NYSE firms and by Baker, Veit, and Powell (2001) for NASDAQ

firms. For all questions, significant differences at the 0.01 level exist among the three groups of

respondents. Based on the chi-square test for independent samples in Panel A, the most

influential person in developing the firm’s dividend policy differs significantly among the

Norwegian, NYSE, and NASDAQ firms. The CFO is most influential for Norwegian firms but the

CEO occupies this role for U.S. firms.

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Another question concerns the frequency that a firm formally examines its dividend

policy. As Panel B shows, the majority of respondents for all three groups say that their firms

reexamine dividend policy annually. None of the Norwegian managers report that their firms

formally reexamine dividend policy on a quarterly basis compared with 19.2% and 36.7% of

responses from NYSE and NASDAQ firms, respectively.

The third question focuses on whether firms have an explicit target payout ratio. As

Panel C indicates, a smaller percentage of Norwegian firms (21.2%) report having a target

payout ratio compared with NYSE (52.5%) and NASDAQ (50.5%) firms. Although not presented

in Table 1, chi-square tests show that the responses differ significantly between Norwegian and

NYSE firms (Π

= 11.111 with df = 1) and Norwegian and NASDAQ firms (Π

= 9.710 with df =

1) at the 0.01 level, but not between the NYSE and NASDAQ firms (Π

= 0.153 with df = 1) at

the 0.05 level.

What do these findings suggest about the administration of dividend policy in Norway

compared with the U.S.? The results show that managers of Norwegian firms reexamine their

dividend policies less often and a lower percentage of firms have an explicit target payout ratio.

An implication of this evidence is that Norwegian managers, in general, may have greater

flexibility in setting their dividend payout than do managers of U.S. firms.

Factors Influencing Dividend Policy

Our first research question is “What are the most important factors influencing the

dividend policies of dividend-paying Norwegian firms?” Table 2 presents descriptive statistics

showing the importance level of each of the 22 determinants or factors, identified later as F,

considered by Norwegian managers in setting their firm’s dividend policy. This table lists the

factors based on their weighted mean level of importance. Of particular note is that each factor

is of high importance to at least one respondent. Overall, this evidence suggests that the

importance respondents attach to various factors influencing dividend policy varies among firms.

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That is, the factors influencing dividend policy do not consist of a short list of factors. When

asked whether factors beyond the 22 listed in the survey are important in determining a firm’s

dividend policy, 18.2% of respondents answered “yes.”

Because the survey contains a large number of factors, we focus on the five most

important determinants of dividend policy (F3, F1, F6, F4, and F14). As the positive t-statistics

show, each of these factors is significantly greater than the theoretical mean of 1.5 at the 0.05

level or above using a two-tailed test. In addition, the chi-square tests indicate that the

proportion of moderate/high responses differs significantly from the proportion of none/low

responses for each factor. About 70% or more of the respondents view each of these factors as

of moderate to high importance.

We call these factors first-order determinants of payout policy.

Three of the mostly highly ranked determinants involve earnings -- the level of current

earnings (F3), the stability of earnings (F1), and the level of expected future earnings (F4).

These results support our first hypothesis. For the level of current earnings (F3), the highest

ranked factor, about 91% percent of the respondents view this determinant in the moderate to

high level of importance. Benartzi, Michaely, and Thaler (1997) report a strong past and

concurrent link between earnings and dividend changes. Their evidence suggests that U.S.

corporations seem to increase dividends only after they are reasonably sure that they can

maintain them at the new level. Thus, the importance that Norwegian managers attach to

earnings is not surprising because once firms collect their earnings in the form of cash they can

pay dividends.

Another highly rated determinant influencing dividend policy of Norwegian firms is the

current degree of financial leverage (F6). The high ranking of this factor suggests that

responding managers recognize that a firm’s dividend policy affects not only the amount of

Although not shown in Table 2, additional t-tests indicate that the importance of each of the 22 factors

differ significantly from zero (no importance).

- 19 -

funds available to distribute to stockholders as cash dividends but also its capital structure. All

else equal, as a firm increases its use of fixed cost financing through debt, preferred stock, and

leasing, the company increases its financial risk, earnings volatility, and hence ability to pay

dividends. By contrast, the more of its earnings a firm retains, the greater will be the equity

component of the capital structure. For our sample of 33 responding firms, the mean debt ratio

(total debt to total assets) is 68.5%. The high degree of financial leverage of these firms helps to

explain why respondents attach such importance to this factor (F6).

Julio and Ikenberry (2004) offer another potential rationale for the relation between

dividends and financial leverage. One possibility is to view dividends and high leverage as

substitute corporate governance mechanisms on the theory that both reduce the risk that

companies will waste their free cash flow. Thus, dividends and financial leverage can help

control management’s natural tendency to use excess capital to pursue low-return investments.

The fifth most highly rated determinant influencing dividend policy of Norwegian firms is

liquidity constraints such as the availability of cash (F14). Although both the level and stability of

earnings are important determinants, firms pay dividends from cash, not earnings based on

accrual accounting. Thus, the availability of cash affects a firm’s ability to pay cash dividends.

Firms are typically unwilling to borrow to pay dividends because borrowing would further

increase their degree of financial leverage.

(Insert Table 2 about here)

We conduct chi-square tests to determine whether the distribution of responses (level of

importance) for each of the five most highly ranked factors differs significantly from each other.

As Table 3 shows, no statistically significant differences at the 0.05 level exist among the five

determinants despite their different rankings. Significant differences begin to appear when

comparing the first-order determinants of dividend payout to lower ranked factors. For example,

F3 and F6 (two of the mostly highly ranked factors) differ significantly from F8 (the sixth highest

ranked factor) at the 0.01 and 0.05 level, respectively.

- 20 -

(Insert Table 3 about here)

Of the remaining 17 factors, ten do not differ significantly from the theoretical mean of

1.5 and thus represent factors, on average, of low/moderate importance. These determinants

(F2, F5, F8, F9, F10, F11, F12, F20, F21, and F22) in the second cluster cover a wide spectrum

of factors ranging from legal rules and constraints (F8) to maintain a given payout ratio (F9).

The remaining seven factors (F7, F13, F15, F16, F17, F18, and F19) in the third cluster are

significantly lower than the theoretical mean. About 64% to 82% of the respondents view the

lowest rated factors as of no or low importance. The chi-square tests show that the proportion of

none/low responses differs significantly from that of the moderate/high responses for all but one

(F13) of the seven lowest rated determinants. This evidence lends support to the robustness of

our findings.

Comparing Factors between Norway and the U.S.

Our second research question is “Does the overall importance of dividend determinants

differ between Norwegian and U.S. firms?” The three rightmost columns in Table 2 show the

rankings of the factors influencing dividend policy as viewed by managers of firms listed on the

Oslo Stock Exchange, NYSE (US1), and NASDAQ (US2). Respondents from all markets rank

the same three factors as among the five most important in influencing dividend policy: level of

current earnings (F3), stability of earnings (F1), and level of expected future earnings (F4).

However, the two other factors ranked among the top five by Norwegian managers -- current

degree of financial leverage (F6) and liquidity constraints such as the availability of cash (F14) –

are either not included or ranked lower in the U.S. surveys.

Numerous large differences exist between the relative rankings by Norwegian and U.S.

managers involving the factors influencing dividend policy. For example, one difference is the

importance that U.S. managers attribute to the pattern of past dividends (F2). Managers of

NYSE and NASDAQ companies rank this factor 2 of 20 and 1 of 22, respectively, compared

- 21 -

with 11 of 22 by managers of Norwegian firms. A chi-square test shows a highly significant

difference in the responses among these three groups of managers (

= 57.6, df = 6, p =

0.0001). In the U.S., firms often devote resources to maintain a stable dividend payment pattern

over time. Apparently, managers of Norwegian firms place less importance on past dividends.

An implication of these rankings is that a firm’s past dividend decisions may place less of a

constraint on current decisions for managers in Norway than in the U.S.

Another key difference involves the importance of legal rules and constraints (F8).

Norwegian managers rank this factor 6 of 22 compared with much lower rankings by managers

of NYSE (15 of 20) and NASDAQ (12 of 22) firms. A chi-square test shows a highly significant

difference in the responses among these three groups (

= 16.55, df = 6, p = 0.0111). This

result is consistent with our expectations that Norwegian managers, compared to their U.S.

counterparts, place greater importance on legal rules and constraints. Disparities in ranking may

stem from the different regulatory environments in Norway and the U.S. As previously

discussed, a centralized government in Norway sets regulatory standards and heavily regulates

business in order to ensure stockholders’ rights. In the U.S., the regulatory environment fosters

widespread shareholder participation, not government domination as is evident in certain

Norwegian firms and industries.

A third difference in ranking is the concern about affecting the stock price (F5). As

expected, Norwegian managers rank this factor lower (14 of 22) compared with managers of

NYSE (3 of 20) and NASDAQ (5 of 22) firms. Based on a chi-square test, the responses among

the three groups differ significantly (

= 36.17, df = 6, p = 0.0001). The relatively high ranking

of this factor by U.S. managers suggests that they make the dividend decision with a view

toward maintaining or increasing the firm’s stock price. Apparently, Norwegian managers do not

share this concern about the importance of dividend policy on stock price.

- 22 -

U.S. managers also express a much higher degree of concern that a dividend change

may provide a false signal to investors (F19) than do Norwegian managers. Managers of NYSE

and NASDAQ firms rate this factor as 4 of 20 and 8 of 22, respectively, compared with 18 of 22

by managers of Norwegian firms. A chi-square test reveals a highly significance difference

among the responses of these three groups (

= 45.60, df = 6, p = 0.0001). The lesser concern

that Norwegian managers express about providing a false signal may stem from a strong

regulatory environment and government control.

This rational may also explain the low degree of importance that Norwegian managers

attach to the needs of current shareholders (F7), which ranks 21 of 22, compared with 9 of 20

and 9 of 22 for managers of both NYSE and NASDAQ firms, respectively. A chi-square test

shows a significant difference in the responses among these three groups (

= 16.30, df = 6, p

= 0.0122). The relatively low ranking of this factor may result from the government-dominated

ownership of some Norwegian firms or the diversity of needs between majority and minority

shareholders. Norwegian firms are likely to experience fewer agency problems than are U.S.

firms because of concentrated ownership and oversight by the government.

To test our second hypothesis, we calculate the Spearman rank order correlation

coefficient to determine the strength of the relationship between the rankings of the factors by

Norwegian and U.S. managers. First, we calculate r

for the rankings of factors provided by

managers of Norwegian and NYSE firms. We make several adjustments to facilitate comparing

the results between the current study and Baker and Powell (2000). First, we combine the level

of current earnings (F3) and level of expected future earnings (F4) into a single factor as done in

the NYSE study and rank this factor. Next, we drop four factors (F6, F10, F20, and F22)

contained in the current study but included in the NYSE study. Finally, we rerank the remaining

17 factors. The resulting r

of 0.3828 (t = 1.60 with df = 15 and p = 0.1304) is not significant at

normal levels.

- 23 -

Next, we compare the common factors contained in surveys of managers of Norwegian

and NASDAQ firms. We eliminate the desire to conform to the dividend payout ratio of the

market as a whole (F16) from our analysis because Baker, Veit, and Powell (2001) do not

include this factor in their study. In the current study, F16 is the least important of the 22 factors

influencing dividend policy. The r

is 0.4316 (t = 2.09 with df = 19 and p = 0.0503), which barely

misses being significant at the 0.05 level.

Whether the relative importance of dividend determinants differs between managers of

Norwegian and U.S. firms depends on whether we focus on specific factors or the overall

ranking. As expected, managers of Norwegian and U.S. firms attach similar rankings to

earnings as a determinant of dividend policy. Yet, the evidence shows no significant correlation

at normal levels between the overall rankings of factors influencing dividend policy between

Norwegian and U.S. firms. The correlation of the ranking of factors is stronger between

Norwegian and NASDAQ firms compared with Norwegian and NYSE firms. We speculate that

this result may relate to the characteristics such as firm size in each market. That is, the

characteristics of Norwegian firms in our sample may compare more favorably with NASDAQ

firms than they do with NYSE firms.

Views about Corporate Dividend Policy

Tables 4 through 7 provide the respondents’ opinions about 26 closed-end statements

relating to dividend policy in general. Unlike the previously reported results, these responses do

not relate specifically to the respondents’ firms. We refer to each statement based on its

designation in the survey (A1 through E2). We focus on those statements with responses that

differ significantly from zero (no opinion) at the 0.05 or above level. Where appropriate, we

compare the results of the current study with those of previous U.S. surveys.

Investor/Shareholder Preferences

- 24 -

Table 4 reports how the respondents view six statements (A1 through A6) relating to

investor/shareholder preferences. Based on the t-tests, we reject the null hypothesis that the

mean value of A1, A6, A4, and A2 equals zero. A majority of respondents agree with each of the

four statements. More than 75% of the respondents agree that investors prefer cash to stock

dividends (A1) and a firm should be responsive to the dividend preferences of its shareholders

(A6). The response to A6 is noteworthy because the same respondents rank the needs of

current shareholders (F7) next to last in importance as a factor influencing the dividend policy of

their respective firms. Apparently, a disparity exists between how respondents view this issue

for firms in general and for their specific firms.

Respondents generally agree that majority shareholders have different dividend

preferences than minority shareholders (A4). As previously discussed, government regulations

of Norwegian shareholders prevent any person from holding more than 10% of the outstanding

shares and government ownership dominates some firms and industries. Attempting to

accommodate different preferences among shareholders complicates the task of setting

dividend policy.

Although about 30% express no opinion, respondents, on average, believe that investors

prefer cash dividends today to uncertain future price appreciation (A2). This latter view is

consistent with the bird-in-the-hand explanation for paying dividends, which asserts that paying

higher dividends increases firm value because dividends represent a “sure thing” while share

price appreciation in the future is uncertain. By contrast, when asked their views about this

statement, Baker, Powell, and Veit (2002) report that only 17.2% of respondents from NASDAQ

firms agree. Based on research in the U.S., virtually no empirical support exists for the bird-in-

the-hand explanation for paying dividends.

Miller and Modigliani (1961) call the theory that a high dividend payout ratio will maximize a firm’s value

the bird-in-the-hand fallacy. Bhattacharya (1979) argues that the reasoning underlying the bird-in-the-

- 25 -

(Insert Table 4 about here)

Dividend Setting Process

Table 5 provides insights about how respondents view the dividend setting process. The

responses differ significantly from zero (no opinion) for only 1 of 6 statements. Almost 85% of

the respondents agree that a firm should change dividends based on sustainable shifts in

earnings (B1). This view is consistent with the high level of importance that respondents, on

average, attach to earnings (see F1, F3, and F4 in Table 2) in influencing the dividend policy.

Although not statistically significant at normal levels, the only other statement with which

a majority (51.5%) of respondents agree is that a firm should strive to maintain an uninterrupted

record of dividend payments (B2). In their surveys of U.S. managers, Baker and Powell (1999)

and Baker, Powell, and Veit (2002) report that 74.2% and 95.2% of the respondents from NYSE

and NASDAQ companies, respectively, agree with B2. Based on a chi-square test for

independent samples, the proportion of responses (level of agreement) for B2 differs

significantly among the three groups (

= 62.34, df = 4, p = 0.0001).

Other chi-square tests

show significant differences for B2 between responses of managers of Norwegian and NYSE

firms (Π

= 14.42 with df = 2) and Norwegian and NASDAQ firms level (Π

= 55.3 with df = 2) at

the 0.01 level. An implication of these findings is that the respondents from Norwegian firms

express much less agreement with maintaining an uninterrupted record of dividend payments

than do their U.S. counterparts.

(Insert Table 5 about here)

hand explanation for dividend relevance is fallacious. Survey research by Baker and Powell (1999)

produces mixed results for this explanation of dividend relevance.

To perform the chi-square test and to avoid inadequate cell sizes, we collapse the level of agreement

from five categories to three -- strongly agree and agree (-2 and -1), no opinion (0), and agree and

strongly agree (+1 and +2).

- 26 -

Dividends and Value

The issue of whether dividend policy affects firm value has puzzled researchers and

corporate managers for decades. Research on this issue offers contradictory evidence and

advice to corporate managers.

Table 6 presents responses to six statements involving dividend

policy and value. The responses differ significantly from zero (no opinion) for five of these

statements (C2, C3, C4, C5, and C6).

The two statements with the highest level of agreement are a firm should devise its

dividend policy to produce maximum value for its shareholders (C3) and an optimal dividend

policy strikes a balance between current dividends and future growth that maximizes stock

prices (C4). A total of 87.9% and 84.9%, respectively, of the respondents agree with these two

statements. The high level of agreement with these statements is not surprising given that the

theoretical goal of the firm is to maximize shareholder wealth by maximizing stock price. In fact,

not a single respondent disagrees with C3. Baker and Powell (1999) and Baker, Powell, and

Veit (2002) find that U.S. managers highly agree with these two statements. In addition,

Rappaport (1998) notes that corporate boards nearly universally embrace the goal of

maximizing shareholder value. In addition, this goal has become politically correct.

The responses are significantly positive on three other statements: higher and more

stable dividends are not fully reflected into higher stock prices because the stock market is not

fully efficient (C6); macroeconomic factors are more important in determining stock prices than

dividend policy (C5); and the market places greater value on stable dividends than stable

payout ratios (C2).

The most direct statement relating to dividends and firm value is a change in a firm’s

cash dividends affects its value (C1). Although a majority (51.6%) of the respondents agree with

For a discussion of the impact of dividend policy on firm value, see, for example, Lease et al. (1999)

and Frankfurter and Wood (2003).

- 27 -

this statement, the mean of the response distribution does not differ significantly from zero (no

opinion). Thus, Norwegian managers seem ambivalent about whether dividend policy matters.

The responses to this question about the relation between dividends and firm value are

inconsistent with our expectations. Overall, the responses produce mixed results.

By contrast, when asked the same question, the responses of managers of U.S. firms

are positive and differ significantly from no opinion. According to Baker and Powell (1999),

74.2% of respondents from NYSE firms agree with C1, while Baker, Powell, and Veit (2002) find

that 65.2% of respondents from NASDAQ firms agree. The chi-square test shows that the

proportion of responses (level of agreement) for C1 differs significantly among the three groups

at the 0.01 level (Π

= 18.39 with df = 4). Significant differences at the 0.05 level also exist

between the responses of managers of Norwegian and NYSE firms (Π

= 7.06 with df = 2) as

well as between managers of Norwegian and NASDAQ firm (Π

= 7.42 with df = 2). Compared

with their U.S. counterparts, respondents from Norwegian firms express much less agreement

with the notion that a relation exists between dividend policy and firm value.

(Insert Table 6 about here)

Explanations for Paying Dividends

Although the literature contains numerous theories to explain their pervasive presence,

dividends remain one of the thorniest puzzles in corporate finance. We focus on the signaling

and tax-preference explanations for paying dividends.

According to the signaling explanation,

announcements of cash dividends convey valuable information about management’s

assessment of a firm’s future profitability that other means cannot fully communicate. On

balance, much empirical evidence supports the view of dividends as a signaling device but

recent evidence challenges the signaling theory. According to the tax-preference theory,

See, for example, Lease et al. (2000) for a summary of research on signaling and tax-related dividends.

- 28 -

investors may favor retention of funds over the payment of dividends because of tax-related

reasons. Because the tax effect differs among various types of investors, firms may attract

investors if they have dividend policies appropriate to their particular tax circumstances.

Panel A of Table 7 shows the respondents’ views on six statements that reflect various

aspects of the information content of dividends. The means of all six statements (D1 through

D6) are positive but only five statements (D1, D2, D3, D4, and D6) differ significantly from zero

(no opinion). There is not a single “strongly disagree” response for any of these six statements.

The respondents express the strongest level of agreement (94.0%) with the statement that a

firm should adequately disclose to investors its reasons for changing its dividends (D1). Its

mean of 1.48 is the highest of any of the 26 statements. Such disclosure helps to improve

transparency in the market. The high level of agreement that respondents express is consistent

with Norway’s strict government regulations and disclosure requirements.

Almost 70% of the respondents agree with the notion that investors generally regard

dividend changes as signals about a firm’s future prospects (D2). This is the most direct

statement involving the signaling explanation for paying dividends. This response contrasts

sharply with that provided in Table 2 involving the importance that Norwegian managers attach

to the desire to send a favorable signal to current or potential investors (or lenders) (F20). Only

54.6% of the respondents believe that this factor is of moderate to high importance in

influencing their firms’ dividend policy. In fact, F20 ranks 13 of 22 factors.

The only other statement involving dividends and signaling in which the majority of

respondents agree (55.3%) is dividend increases are ambiguous because they can suggest

either future growth or a lack of investment opportunities (D6). Although managers can use

dividend actions to convey useful information, dividend changes may not be perfect signals.

According to Easterbrook (1984), dividend increases may be ambiguous signals unless the

market can distinguish between growing firms and disinvesting firms. Apparently, Norwegian

managers are aware of this potential ambiguity. Given this awareness, the high level of

- 29 -

agreement that the respondents give to D1 is consistent with reducing any ambiguity involving

the meaning that dividend increases may convey.

Although the average response to the remaining three statements (D3, D4, and D5) is

significantly positive, the percentage of no opinion responses is high, ranging from 42.4% (D3

and D4) to 60.6% (D5). Only 42.5% of the respondents agree that a firm’s stock price generally

rises when the firm unexpectedly increases its dividend (D3) and a firm’s stock price generally

falls when the firm unexpectedly decreases its dividend (D4). Respondents express the lowest

level of agreement (30.3%) with the statement that investors generally use dividend

announcements as information to help assess a firm’s stock value (D5).

Panel B of Table 7 presents the responses on two statements involving the tax-

preference explanation of dividends (E1 and E2). Based on the t-tests, the mean of each

statement does not differ significantly from zero (no opinion). In fact, the typical response

reflects uncertainty with more than 65% of the respondents offering no opinion. Respondents

are uncertain about whether investors generally prefer to invest in firms whose dividend policies

complement their particular tax circumstances (E2). They are also unsure about whether stocks

that pay high (low) dividends attract investors in low (high) tax brackets (E1). Thus, the tax

preference explanation for paying dividends garners little support for Norwegian firms.

Surveys of U.S. managers by Baker and Powell (1999) and Baker, Powell, and Veit

(2002) provide responses on similar statements involving signaling and tax preferences. Both

studies provide strong support for the signaling explanation for paying dividends, but find little or

no support for the tax preference explanation. In general, the relative importance that managers

of Norwegian and U.S. firms attach to signaling versus tax preferences as an explanation for

paying dividends is similar.

Taken as a whole, the evidence supports our hypothesis that Norwegian managers favor

signaling over the tax preference explanation for paying dividends. Based on the relatively low

ranking of factors related to signaling (F19 and F20) shown in Table 2, Norwegian managers

- 30 -

generally appear to view the role of dividends as signaling device as minimal. When they offer

their opinions in general, they point to the possible role of dividend policy as a signaling

mechanism.

6. Summary and Conclusions

We survey managers of dividend-paying firms listed on the Oslo Stock Exchange to

identify the most important factors in making dividend policy decisions and to learn their views

about various dividend-related issues. Where appropriate, we compare the views of managers

of Norwegian and U.S. firms. Some findings are consistent with our predictions, but others are

surprising. Nonetheless, this survey evidence is still important because it reinforces some earlier

findings while not supporting others using a different country and period. The findings of this

survey lead to several conclusions about dividend policy.

First, the most important factors influencing the dividend policy of Norwegian firms relate

to earnings, specifically the level of current and expected future earnings as well the stability of

earnings. Other significant determinants of dividend policy include the current degree of

financial leverage and liquidity constraints. Based on our evidence, we conclude that the same

factors influencing dividend decisions are not equally important to all firms. We surmise that no

universal set of factors applies equally to all firms.

Second, the relative importance that managers of Norwegian firms attach to earnings in

influencing dividend policy is similar to that previously reported by managers of U.S. firms.

However, distinct differences exist in the importance that managers attach to numerous factors.

For example, managers of Norwegian firms view legal rules and constraints as more important

than do their U.S. counterparts. By contrast, managers of U.S. firms rank the pattern of past

dividends as more important than do managers of Norwegian firms. No significant correlation

exists between the rankings of factors by managers of Norwegian and NYSE or NASDAQ firms.

- 31 -

Third, Norwegian managers generally support some statements related to the concept

that a firm’s dividend policy matters. They show a high level of agreement that a firm should

devise its dividend policy to produce maximum value for its shareholders. In addition, they agree

that an optimal dividend policy strikes a balance between current dividends and future growth

that maximizes stock price. Yet, these managers appear ambivalent when asked whether a

change in a firm’s cash dividends affects its value. Compared with their U.S. counterparts,

respondents from Norwegian firms express much less agreement with the notion that a relation

exists between dividend policy and firm value.

Finally, managers of Norwegian firms express stronger support for a signaling

explanation for paying dividends than they do for a tax-preference explanation. Yet, the majority

of responses appear ambivalent to whether investors generally use dividend announcements as

information to help assess a firm’s stock value. For firms in general, the evidence suggests that

dividend policy plays a possible role as a signaling mechanism.

- 32 -

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Table 1. Administration of Dividend Policy

This table presents the responses to questions about the administration of dividend policy.

Panel A identifies the person who is most influential in developing corporate dividend policy.

Panel B indicates how often firms re-examine their dividend policies. Panel C shows the

proportion of firms that have target payout ratios. Conducting the chi-square tests required

collapsing the responses into the two classes: annual and quarterly/other in Panel B and yes

and no/don’t know in Panel C. The chi-square tests show significant differences between the

responses of Norwegian and U.S. respondents.

Question Norway

(n = 33)

US1

NYSE

(n = 198)

US2

NASDAQ

(n = 188)

stat

Panel A. Who is most influential in developing the dividend policy ultimately

approved by your board of directors?

Chief Financial Officer (CFO) 54.5% 43.9% 25.5%

Chief Executive Office (CEO) 30.3 47.5 66.5

Other 15.2 8.6 8.0

31.432**

(df = 4)

Panel B. How often does your firm formally reexamine its dividend policy?

Quarterly 0.0 18.2 36.7

Annually 87.9 73.7 59.0

Other 12.1 8.1 4.3

15.976**

(df = 2)

Panel C. Does your firm have an explicit target payout ratio (a long-term desired

dividend-to-earnings ratio)?

Yes 21.2 52.5 50.5

No 75.8 46.0 48.9

Don’t know 3.0 1.5 0.5

11.3519**

(df = 2)

Baker and Powell (2000, p. 39).

Baker, Veit, and Powell (2001, p. 31).

** Significant at the 0.05 and 0.01 levels, respectively.

- 36 -

Table 2. Factors Influencing Dividend Policy

This table presents descriptive statistics showing the level of importance of 22 factors

considered by managers of Norwegian firms in setting their firms’ dividend policies. The table

lists the determinants according to the overall ranking from the highest to lowest mean. The t-

statistic indicates whether the mean is statistically different from 1.5 (the theoretical mean of the

importance scale). The chi-square statistic indicates whether the combined none/low responses

differ significantly from the combined moderate/high responses. The rightmost columns contain

the ranking of factors considered by managers of U.S. corporations listed on the NYSE (US1)

and NASDAQ (US2) in setting their firms’ dividend policies as reported by Baker and Powell

(2000, 2001), respectively.

Level of Importance

(%) Rank

Factor

None

Low

Mod

High

Mean

(Std

Dev)

stat

Nor US1 US2

F3. Level of current

earnings

3.0 6.1 48.5 42.4 2.30

(0.728)

6.335** 22.091** 1 1

F1. Stability of earnings 3.0 18.2 42.4 36.4 2.12

(0.820)

4.352** 10.939** 2 5 2

F6. Current degree of

financial leverage

9.1 12.1 48.5 30.3 2.00

(0.901)

3.187** 10.939** 3 NA 10

F4. Level of expected

future earnings

9.1 18.2 45.5 27.3 1.91

(0.914)

2.571* 6.818** 4.5 1

F14. Liquidity constraints

such as the

availability of cash

12.1 18.2 36.4 33.3 1.91

(1.011)

2.324* 5.121* 4.5 7 14

F8. Legal rules and

constraints

18.2 27.3 21.2 33.3 1.70

(1.132)

1.000 0.273 6 15 12

F11. Expected rate of

return on the firm’s

assets

12.1 33.3 36.4 18.2 1.61

(0.933)

0.653 0.273 7 12 11

F12. Concern about

maintaining a target

capital structure

12.1 21.2 63.6 3.0 1.58

(0.751)

0.579 3.667 8.5 10 6

F22. Investment

considerations such

as the availability of

profitable investments

12.1 39.4 27.3 21.2 1.58

(0.969)

0.449 0.030 8.5 6 15

F10. Availability of

alternative sources of

capital

9.4 43.8 28.1 18.8 1.56

(0.914)

0.387 0.125 10 NA 17

F2. Pattern of past

dividends

15.2 30.3 39.4 15.2 1.55

(0.938)

0.278 0.273 11 2 1

F21. Financing

considerations such

as the cost of raising

external funds (debt

or equity)

6.1 51.5 33.3 9.1 1.45

(0.754)

-0.346 0.758 12 11 19

F20. Desire to send a

favorable signal to

current or potential

investors (or lenders)

18.2 27.3 48.5 6.1 1.42

(0.867)

-0.502 0.273 13 NA 16

F5. Concern about

affecting the stock

price

18.2 42.4 30.3 9.1 130

(0.883)

-1.281 1.485 14 3 5

- 37 -

Table 2. Factors Influencing Dividend Policy (Continued)

Level of Importance (%) Rank

Factor

None

Low

Mod

High

Mean

(Std

Dev)

stat

Nor US1 US2

F9. Desire to maintain

a given payout ratio

24.2 39.4 27.3 9.1 1.21

(0.927)

-1.783 2.455 15.5 8 7

F13. Projections about the

future state of the

economy

18.2 45.5 33.3 3.0 1.21

(0.781)

-2.118* 2.455 15.5 17 18

F15. Desire to conform to

the industry's dividend

payout ratio

18.2 57.6 18.2 6.1 1.12

(0.781)

-2.786** 8.758** 17 13 13

F19. Concern that a

dividend change may

provide a false signal

to investors

15.2 66.7 12.1 6.1 1.09

(0.723)

-3.250** 13.364** 18 4 8

F17. Contractual

constraints such as

dividend restrictions

in debt contracts

39.4 30.3 24.2 6.1 0.97

(0.951)

-3.202** 5.121* 19 14 21

F18. Preference to pay

dividends instead of

undertaking risky

rereinvestments

30.3 48.5 18.2 3.0 0.94

(0.788)

-4.086** 10.939** 20 18 20

F7. Needs of current

shareholders

33.3 48.5 12.1 6.1 0.91

(0.843)

-4.028** 13.364** 21 9 9

F16. Desire to conform to

the dividend payout

ratio of the market as

a whole

30.3 51.5 15.2 3.0 0.91

(0.765)

-4.437** 13.364** 22 NA NA

Other factors examined in Baker and Powell (2001), but not included in Table 2 and the current survey,

are characteristics of current shareholders such as their tax positions (rank 16 of 20); prestige associated

with paying dividends (rank 19 or 20); and control issues such as the firm’s ownership structure (rank 20

of 20). Baker and Powell (2000) include stockholder characteristics (e.g. the stockholders marginal tax

rates) (rank 22 of 22).

The total number of responses for all factors is 33, except 32 for F10.

Baker and Powell (2000) combine these two factors into a single factor called the level of current and

expected future earnings.

** Significant at the 0.05 and 0.01 levels, respectively.

- 38 -

Table 3. Difference in Importance between the Top-Ranked Factors Influencing

Dividend Policy

This table shows the results of the chi-square tests, which indicate whether a statistically

significant difference exists between the distributions (level of importance) of each pair of high-

ranked factors (F3, F1, F6, F4, and F14). The remaining factor, legal rules and constraints (F8),

is the most highly ranked factor that is not statistically different from 1.5 (the theoretical mean).

To perform the chi-square tests required collapsing the cells for level of importance from four

categories to three categories: none/low (0 and 1), moderate (2), and high (3). Each chi-square

test of significance has two degrees of freedom.

Chi-Square Value

Factor

F1 F6 F4 F14 F8

F3. Level of current earnings 1.89 2.27 4.12 4.70 11.88**

F1. Stability of earnings 0.32 0.71 0.73 5.29

F6. Current degree of financial

Leverage

0.33 1.15 6.48*

F4. Level of expected future

earnings

1.15 4.61

F14. Liquidity constraints such

as the availability of cash

2.32

** Significant at the 0.05 and 0.01 levels, respectively.

- 39 -

Table 4. Views about Investor/Shareholder Preferences

This table presents descriptive statistics reflecting the respondents’ opinions on six statements

related to investor/shareholder preferences (A1 to A6). The null hypothesis is that the mean

does not differ significantly from zero (no opinion). The number of responses is 33 for each

statement.

Level of Agreement (%)

Statement

Strongly

Disagree

-2

Disagree

-1

Opinion

Agree

Strongly

Agree

Mean

(Std

Dev)

t-stat

A1. Investors prefer cash to

stock dividends.

0.0 6.1 18.2 42.4 33.3

1.03

(0.883)

6.700**

A6. A firm should be responsive

to the dividend preferences

of its shareholders.

3.0 9.1 9.1 57.6 21.2

0.85

(0.972)

5.014**

A4. Majority shareholders have

different dividend

preferences than minority

shareholders.

3.0 18.2 27.3 36.4 15.2

0.42

(1.062)

2.296*

A2. Investors prefer cash

dividends today to uncertain

future price appreciation.

3.0 15.2 30.3 45.5 6.1

0.36

(0.929)

2.248*

A5. If investors perceive the

stock market as displaying

unsatisfactory transparency

and disclosure practices, the

dividend should be higher to

attract investors and sustain

prices.

3.0 24.2 27.3 36.4 9.1

0.24

(1.032)

1.350

A3. Inside shareholders have

different dividend

preferences than outside

shareholders.

9.1 21.2 36.4 24.2 9.1

0.03

(1.104)

0.158

** Significant at the 0.05 and 0.01 levels, respectively.

- 40 -

Table 5. Views about the Dividend Setting Process

This table presents descriptive statistics reflecting the respondents’ opinions on six statements

related to the dividend setting process (B1 to B6). The null hypothesis is that the mean does not

differ significantly from zero (no opinion). The number of responses is 33 for all statements.

Level of Agreement (%)

Statement

Strongly

Disagree

-2

Disagree

-1

Opinion

Agree

Strongly

Agree

Mean

(Std

Dev)

t-stat

B1. A firm should change

dividends based on

sustainable shifts in earnings.

3.0 3.0 9.1 54.5 30.3

1.06

(0.899)

6.775**

B2. A firm should strive to

maintain an uninterrupted

record of dividend payments.

0.0 27.3 21.2 42.4 9.1

0.33

(0.990)

1.935

B6. A firm should avoid

increasing its regular

dividend if it expects to

reverse the dividend decision

in a year or so.

6.1 18.2 27.3 36.4 12.1

0.30

(1.104)

1.577

B4. A firm should view cash

dividends as a residual after

funding desired investments

from earnings.

12.1 18.2 27.3 30.3 12.1

0.12

(1.219)

0.571

B5. A firm should set a target

dividend payout ratio and

periodically adjust its current

payout toward the target.

9.1 18.2 39.4 30.3 3.0

0.00

(1.000)

0.000

B3. A firm should have a

dividend policy similar to

other listed firms in the same

industry.

3.0 33.3 30.3 33.3 0.0

-0.06

(0.899)

-0.387

** Significant at the 0.05 and 0.01 levels, respectively.

- 41 -

Table 6. Views about Dividend Policy and Value

This table presents descriptive statistics reflecting the respondents’ opinions on six statements

related to dividend policy and value (C1 to C6). The t-statistics test the null hypothesis that the

mean does not differ significantly from zero (no opinion). The number of responses is 33 for all

statements.

Level of Agreement (%)

Statement

Strongly

Disagree

-2

Disagree

-1

Opinion

Agree

Strongly

Agree

Mean

(Std

Dev)

t-stat

Dividend Policy and Value

C3. A firm should devise its

dividend policy to produce

maximum value for its

shareholders.

0.0 0.0 12.1 45.5 42.4

1.30

(0.684 )

10.944**

C4. An optimal dividend policy

strikes a balance between

current dividends and future

growth that maximizes stock

price.

0.0 3.0 12.1 36.4 48.5

1.30

(0.810 )

9.247**

C6. Higher and more stable

dividends are not fully

reflected into higher stock

prices because the stock

market is not fully efficient.

0.0 3.0 33.3 54.5 9.1

0.70

(0.684 )

5.854**

C5. Macroeconomic factors are

more important in

determining stock prices than

dividend policy.

6.1 12.1 18.2 42.4 21.2

0.61

(1.144 )

3.043**

C2. The market places greater

value on stable dividends

than stable payout ratios.

0.0 12.1 45.5 42.4 0.0

0.30

(0.684 )

2.545*

C1. A change in a firm’s cash

dividends affects its value.

12.1 15.2 21.2 45.5 6.1

0.18

(1.158)

0.902

** Significant at the 0.05 and 0.01 levels, respectively.

- 42 -

Table 7. Explanations of Dividend Policy: Signaling and Tax Preferences

This table presents descriptive statistics reflecting the respondents’ opinions on two common

explanations for paying dividends – signaling (D1 to D6) and tax preferences (E1 and E2). The

null hypothesis is that the mean does not differ significantly from zero (no opinion). The number

of responses is 33 for all statements except D6, which has 32 responses.

Level of Agreement (%)

Statement

Strongly

Disagree

-2

Disagree

-1

Opinion

Agree

Strongly

Agree

Mean

(Std

Dev)

t-stat

Panel A. Dividends and Signaling

D1. A firm should adequately

disclose to investors its

reasons for changing its

dividends.

0.0% 3.0% 3.0% 36.4% 57.6%

1.48

(0.712 )

11.973**

D2. Investors generally regard

dividend changes as signals

about a firm’s future

prospects.

0.0% 12.1% 18.2% 57.6% 12.1%

0.70

(0.847 )

4.726**

D6. Dividend increases are

ambiguous because they can

suggest either future growth

or a lack of investment

opportunities.

0.0% 12.5% 31.3% 43.8% 12.5%

0.56

(0.878)

3.626**

D3. A firm’s stock price generally

rises when the firm

unexpectedly increases its

dividend.

0.0% 15.2% 42.4% 36.4% 6.1%

0.33

(0.816)

2.345*

D4. A firm’s stock price generally

falls when the firm

unexpectedly decreases its

dividend.

0.0% 15.2% 42.4% 36.4% 6.1%

0.33

(0.816)

2.345*

D5. Investors generally use

dividend announcements as

information to help assess a

firm’s stock value.

0.0% 9.1% 60.6% 30.3% 0.0%

0.21

(0.600)

2.031

Panel B. Dividends and Taxes

E2. Investors generally prefer to

invest in firms whose

dividend policies complement

their particular tax

circumstances.

0.0% 9.1% 66.7% 24.2% 0.0%

0.15

(0.566)

1.538

E1. Stocks that pay high (low)

dividends attract investors in

low (high) tax brackets.

3.0% 12.1% 69.7% 12.1% 3.0%

0.00

(0.707)

0.000

** Significant at the 0.05 and 0.01 levels, respectively.

- 43 -

Appendix: Survey Instrument

I. DETERMINANTS OF DIVIDEND POLICY

Directions

: Circle the number corresponding to the level of importance of each factor in determining your firm’s

dividend policy (a firm’s decision about the size of dividends to pay to its shareholders).

Level of Importance Circle One

None Low Moderate High Level of Importance

0 1 2 3 None High

1. Stability of earnings 0 1 2 3

2. Pattern of past dividends 0 1 2 3

3. Level of current earnings 0 1 2 3

4. Level of expected future earnings 0 1 2 3

5. Concern about affecting the stock price 0 1 2 3

6. Current degree of financial leverage 0 1 2 3

7. Needs of current shareholders 0 1 2 3

8. Legal rules and constraints 0 1 2 3

9. Desire to maintain a given payout ratio 0 1 2 3

10. Availability of alternative sources of capital 0 1 2 3

11. Expected rate of return on the firm’s assets 0 1 2 3

12. Concern about maintaining a target capital structure 0 1 2 3

13. Projections about the future state of the economy 0 1 2 3

14. Liquidity constraints such as the availability of cash 0 1 2 3

15. Desire to conform to the industry’s dividend payout ratio 0 1 2 3

16. Desire to conform to the dividend payout ratio of the market as a whole 0 1 2 3

17 Contractual constraints such as dividend restrictions in debt contracts 0 1 2 3

18. Preference to pay dividends instead of undertaking risky reinvestments 0 1 2 3

19. Concern that a dividend change may provide a false signal to investors 0 1 2 3

20. Desire to send a favorable signal to current or potential investors (or lenders) 0 1 2 3

21. Financing considerations such as the cost of raising external funds (debt or equity) 0 1 2 3

22. Investment considerations such as the availability of profitable investments 0 1 2 3

Are factors other than those listed above important in determining your firm’s dividend policy?

 Yes  No  Don’t know

If yes, identify the most important factor: _________________________________________________________

__________________________________________________________________________________________

II. BACKGROUND INFORMATION

Directions

: Answer the following questions as they apply to your firm by placing a check mark () next to the

preferred answer. If you answer “other,” please provide specifics.

1. Who is most influential in developing the dividend policy ultimately approved by your board of directors?

 Chief Financial Officer  Chief Executive Officer  Other: _________________________

2. How often does your firm formally reexamine its dividend policy?

 Quarterly  Annually  Other: _____________________________

3. Does your firm have an explicit target payout ratio (a long-term desired dividend-to-earnings ratio)?

 Yes  No  Don’t know

4. What is the principal nature of your firm’s business?  Financial  Nonfinancial

5. Are you actively involved in determining your firm’s dividend policy?  Yes  No

6. What is your current position or title? _____________________________________________________

Please turn the page Company Code _________

- 44 -

III. ISSUES INVOLVING CORPORATE DIVIDEND POLICY

Directions: Circle the number corresponding to your level of agreement or disagreement with each statement

about dividend policy in general.

Level of Agreement

Strongly No Strongly Circle One

Disagree Disagree Opinion Agree Agree Level of Agreement

-2 -1 0 +1 +2 Disagree Agree

A. Investor/Shareholder Preferences

1. Investors prefer cash to stock dividends. -2 -1 0 +1 +2

2. Investors prefer cash dividends today to uncertain future price appreciation. -2 -1 0 +1 +2

3. Inside shareholders have different dividend preferences than outside shareholders. -2 -1 0 +1 +2

4. Majority shareholders have different dividend preferences than minority shareholders. -2 -1 0 +1 +2

5. If investors perceive the stock market as displaying unsatisfactory transparency and

disclosure practices, the dividend should be higher to attract investors and sustain prices. -2 -1 0 +1 +2

6. A firm should be responsive to the dividend preferences of its shareholders. -2 -1 0 +1 +2

B. Dividend Setting Process

1. A firm should change dividends based on sustainable shifts in earnings. -2 -1 0 +1 +2

2. A firm should strive to maintain an uninterrupted record of dividend payments. -2 -1 0 +1 +2

3. A firm should have a dividend policy similar to other listed firms in the same industry. -2 -1 0 +1 +2

4. A firm should view cash dividends as a residual after funding desired investments

from earnings. -2 -1 0 +1 +2

5. A firm should set a target dividend payout ratio and periodically adjust its current

payout toward the target. -2 -1 0 +1 +2

6. A firm should avoid increasing its regular dividend if it expects to reverse the dividend

decision in a year or so. -2 -1 0 +1 +2

C. Dividend Policy and Value

1. A change in a firm’s cash dividends affects its value. -2 -1 0 +1 +2

2. The market places greater value on stable dividends than stable payout ratios. -2 -1 0 +1 +2

3. A firm should devise its dividend policy to produce maximum value for its shareholders. -2 -1 0 +1 +2

4. An optimal dividend policy strikes a balance between current dividends and future

growth that maximizes stock price. -2 -1 0 +1 +2

5. Macroeconomic factors are more important in determining stock prices than dividend

policy. -2 -1 0 +1 +2

6. Higher and more stable dividends are not fully reflected into higher stock prices

because the stock market is not fully efficient. -2 -1 0 +1 +2

D. Dividends and Signaling

1. A firm should adequately disclose to investors its reasons for changing its dividends. -2 -1 0 +1 +2

2. Investors generally regard dividend changes as signals about a firm’s future prospects. -2 -1 0 +1 +2

3. A firm’s stock price generally rises when the firm unexpectedly increases its dividend. -2 -1 0 +1 +2

4. A firm’s stock price generally falls when the firm unexpectedly decreases its dividend. -2 -1 0 +1 +2

5. Investors generally use dividend announcements as information to help assess a

firm’s stock value. -2 -1 0 +1 +2

6. Dividend increases are ambiguous because they can suggest either future growth

or a lack of investment opportunities. -2 -1 0 +1 +2

E. Dividends and Taxes

1. Stocks that pay high (low) dividends attract investors in low (high) tax brackets. -2 -1 0 +1 +2

2. Investors generally prefer to invest in firms whose dividend policies complement

their particular tax circumstances. -2 -1 0 +1 +2

If you want a summary of the findings, indicate your e-mail address: ____________________________________

Please check to see that you answered each question. Thank you for your help.