Residual Dividends: A Quasi-natural Experiment

Abstract

On December 15, 1976, a just-promulgated corporate law introduced, among other innovations, a minimum required dividend distribution on annual basis in Brazil. As a conceptual reference, this article refers to the so-called residual theory of dividend policy. According to this theory, dividends are determined from what is left after optimal investment and financing decisions are made by the firm. The introduction of a minimum required dividend represented the imposition of a constraint on that behavior by the firms. The hypothesis that this constraint affected the firms’ investment behavior is tested herein, and this is confirmed with the use of an interaction term with dividend payments. A “difference-in-differences” approach is adopted, with data for 233 publicly owned firms in the 1973-1980 period.

Keywords: Dividend policy, Residual theory, Corporate legislation.

JEL Classification: G35, G38.