Dividend Policy Following Mergers and Acquisitions: U.S. Evidence

Abstract

Purpose - The purpose of this paper is to address the question of whether past dividend policies of acquirer and target firms impact dividend policies following U.S. mergers and acquisitions. Design/Methodology/Approach - The catering theory is considered as a theoretical approach to test the impact of past dividend policies of acquirer and target firms on the post-merger dividend policy. For the empirical design, dividend policy is captured using payout ratio and dividend yield, and specifications are estimated using OLS and Tobit regressions.

Findings - The authors find both target and acquirer payout ratios affect the payout ratios of combined entities in cases of stock-based deals. This result provides support for catering theory, which maintains that managers of acquirers adjust payout ratios following transactions to cater to target shareholders’ preferences.

Research limitations - Although the tests suggest significant results using payout ratio as a measure of dividend, we do not find a similar effect for dividend yield.

Practical implications - Financial analysts evaluating merger-acquisition announcements may wish to predict the dividend policy following stock-based deals as they project the likely impact of past dividend policies of acquirer and target firms. The results are also likely to be useful to investors.

Originality/value - The paper presents new evidence about dividend policy following mergers and acquisitions. To the knowledge, this is the first study that examines how an acquirer's dividend policy is affected by an acquisition.

Keywords: dividend policy, merger-acquisition, catering theory, method of payment, payout

JEL Classification: G34, G35