Determinants of Dividends in the Telecommunications Sector.
| Autor | Neves, Maria Elisabete Duarte |
1 Introduction
Dividend policy has long been a question of interest in the financial literature and, although there is a great deal of research on the subject, it remains an open issue.
In fact, dividends have been considered for decades as a puzzle and, since Miller and Modigliani (1961), many authors have tried to give alternative explanations for dividend policies in imperfect markets.
For example, Banerjee, Gatchev, and Spindt (2007) argue that clientele effects based on transaction costs represent a significant part of the decline in the propensity to pay dividends. Amihud and Li (2006) also document the phenomenon called "disappearing dividends" by Fama and French (2001), which describes the decrease in dividend information content since the mid-1970s, making companies less willing to incur the associated costs. DeAngelo, DeAngelo, and Skinner (2004) base their explanation of the phenomenon of declining dividends on the concentration of dividends by the main payers of North American companies, as well as on the decline in the frequency of payments of special dividends in the last few years. Brav, Graham, Harvey, and Michaely (2005) showed empirically that the greater flexibility of share buybacks has led managers to favor dividends, a result also corroborated by Skinner (2008).
In fact, the investigations have had some success in explaining the payment of dividends through a variety of market imperfections, such as agency problems (see, for example, Easterbrook, 1984; Gugler, 2003; Jensen, 1986; Jiraporn, Kim, & Kim, 2011; La Porta, Lopez-De-Silanes, Shleifer, & Vishny, 2000), information asymmetries (see, for example, M. Baker, Stein, & Wurgler, 2003; Miller and Rock, 1985) and taxes (see, for example, Amihud & Murgia, 1997; Bell & Jenkinson, 2002; Lasfer, 1996; Morck & Yeung, 2005; Oswald & Young, 2004; Rau & Vermaelen, 2002). More recently, other explanations, based on behavioral finance, have been emphasized, such as investor sentiments and market timing (see, among others, M. Baker & Wurgler, 2004; M. Baker, Wurgler, & Yuan, 2012).
In view of the constant technological changes that affect the telecommunications sector in particular, it is important to understand the characteristics that most influence the payment of dividends in this sector. The development of the mobile internet and the consequent impact it has on the lives of all of us means telecommunications companies play a fundamental role in the world economy, increasing interest in the literature on the viability of telecommunications as one of the determinants of economic growth (Sridhar & Sridhar, 2007).
Given the growing interest in the topic, not only for academics, but also for managers, investors, and society in general, this article aims to determine the specific characteristics of the companies under analysis that most contribute to explaining the distribution of dividends in the telecommunications sector, traditionally considered to be one that distributes higher levels of earnings. In addition, we intend to verify the overall significance of these characteristics under the effect of the global financial crisis, which reached its peak with the bankruptcy of Lehman Brothers in 2008.
To achieve this objective, we propose an explanatory model of dividends based on traditional theories and which includes variables of investment, financing, and short-term management, for the period from 2007 to 2016 and, in addition, with the purpose of capturing the differences in a period considered to be a global financial crisis, for the period between 2008 and 2013, following Neves, Fernandes, and Martins (2019).
The estimation of the model, using the generalized method of moments (GMM) for a sample that includes listed telecommunications companies based in the United States, Canada, and Europe, with data on dividends paid in the period under study, shows interesting results. We found that there are no significant differences in the specific determinants of dividends in this sector, in stable or crisis periods, corroborating the idea that it is a sector of enormous expansion and potential interest for investors. Companies that pay dividends maintain this behavior, even in periods of sharp global recession.
This article is structured as follows: in the following section, a brief review of the literature on the topic is presented; in Section 3, the data, variables, and methodology are presented; in Section 4, the model is applied and the main results are discussed; finally, in Section 5, the main conclusions, limitations, and suggestions for future research are laid out.
2 Literature Review and Hypotheses
The traditional view arising from the thinking of Lintner (1956) tells us that dividend policy is a function of current profits and past dividends, and is decisive for the company's valuation in the market. Miller and Modigliani (1961) argue that the dividends that companies pay do not affect the value of their shares or the profitability of investors, because the higher the dividends, the greater the capital appreciation, and it is irrelevant when choosing a company to invest in whether it distributes dividends or not, if the market works efficiently, and if taxes and transaction costs are excluded.
Since the market does not work efficiently, and there are taxes and transaction costs, the theories to explain dividends are diverse, with the following being possible: the clientele theory, defended by Allen, Bernardo, and Welch (2000), Black and Scholes (1974), and Miller and Modigliani (1961); Bhattacharyya's (1979) "bird in hand" theory; agency theory, by Jensen and Meckling (1976); Bhattacharya's (1979) signaling theory, corroborated by Brickley (1983); the theory of fiscal disadvantages, by Allen and Michaely (2003) and Damoradan (2001); Allen and Michaely's (2003) theory of transaction costs; and Baker and Wurgler's (2004) dividend catering theory. Based on traditional theories of dividends, our paper proposes six specific variables in explaining the dividends distributed per share. For example, Gregoriou, Healy, and Gupta (2015), following literature related to market valuation and expectations of high earnings in high-tech companies (Chiang & Mensah, 2004; Glaum & Friedrich, 2006), also opted for financial determinants to explain the volatility of telecommunications companies' share price. The first variable to consider will be investment in fixed assets. Partington and Chenhall (1983) demonstrate that the motivation to pay dividends and the amount paid depends on the investment made and growth potential. "The relationship they demonstrate is a negative one in that growth opportunities invalidate all the financial availability that would be used to pay dividends (Faccio, Lang, & Young, 2001; Gaver & Gaver, 1993; Smith & Watts, 1992). Companies with the greatest growth potential tend to retain most of their earnings in order to reduce dependence on more expensive external financing (Alli, Khan, & Ramirez, 1993; Kania & Bacon, 2005). Likewise, DeAngelo, DeAngelo, and Stulz (2006), Fama and French (2001), and Jabbouri (2016) observed that companies' propensity to pay dividends was negatively associated with growth opportunities.
On the other hand, if shareholders feel insecure and doubt the company's future results, because of investment projects with a negative net present value (NPV), they will prefer the company to distribute its gains in the form of dividends instead of taking advantage of the possible investment opportunities (La Porta et al., 2000). Also, Denis and Osobov (2008) found that the association between dividends and growth opportunities was not always the same. The authors show that the likelihood that companies will pay dividends was negatively related to growth opportunities in common law countries; however, this relationship was positive in civil law countries.
Given that in the sample used in the present study, the probabilities of future investment were not apparent, but there was variability of net investment in fixed assets year on year, our first hypothesis suggests a possible negative relationship between investment and dividends.
H1: The greater the investment in fixed assets, the lower the dividends paid per share.
With regard to the capital structure, several studies show the influence of this variable on dividend policy (H. K. Baker, Powell, & Veit, 2001). However, the financial literature is not consistent, as there are authors who prove a positive relationship between debt and dividends, while others corroborate the existence of a negative relationship between these variables.
For example, Smith and Watts (1992) verified the existence of a positive relationship between dividend yield and indebtedness. The authors attributed this association to the fact that managers, based on the company's growth opportunities, jointly decide on the dividend and indebtedness policy. Neves (2018) also observed a positive relationship between indebtedness and the payout ratio based on the complementarity between debt and dividends as a control mechanism (Jensen, 1986). On the other hand, Rozeff (1982) points out that companies with high financial leverage tend to have low levels of dividend payments, in order to reduce transaction costs associated with external financing. Also, Jabbouri (2016), Papadopoulos and Charalambidis (2007), and Eije and Megginson (2008) observed a negative relationship between dividends and the debt ratio.
Considering the previous literature, in our second hypothesis, which seeks to relate debt and dividends, we have not defined the sign.
H2a: There is a negative relationship between the level of corporate debt and the dividend per share.
H2b: There is a positive relationship between the level of corporate debt and the dividend per share.
Regarding book value (per share) as a possible determinant of the distribution of dividends, there is not much literature that can be directly quoted, since...
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