Flexibility of Dividend Policies and Shareholders' Returns in the European Union

Abstract

We study dividend policies and dividend flexibility and use the annual abnormal return methodology to investigate the impact of more or less flexible policies for stock returns. We focus on the European Union which accommodates two corporate governance systems. We show that common law companies focus on cash dividends while civil law companies are more frequent repurchasers. This indicates that common law companies have more rigid dividend policies. Common law companies also have larger target payout ratios and smaller speeds of adjustment than civil law companies. Concomitantly, stockholders' reactions to cash dividends initiations and changes are fiercer in common law companies. In civil law companies relatively large repurchase amounts increase average abnormal returns, while a frequent use of repurchases diminishes abnormal returns. Common law shareholders strongly prefer an increase of cash dividends above an increase in repurchases, if a company already distributed through repurchases and cash dividends in the previous year. In civil law companies, repurchase increases are then slightly preferred.

Keywords: payout flexibility, shareholder returns, cash dividends, repurchases, European Union

JEL Classification: G35, G34, G14