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Dividend policy in a framework of symmetrical information

1. 
   Lintner's analysis
   

   1. Lintner's model

The models which attempt to explain dividend policies rely on the idea that the variations of payments over time can be explained by the fact that firms tend to adjust their dividend according to a target dividend. The first model carried out in this field is that of Lintner (1956) which considers (1956, p. 107) that: “the model can be represented like the following

  

equation

D 

c (D^* D

) u where D_it is the change in dividend payments, c_i

it i

i it

i (t 1) it

indicates the fraction of the difference between this ‘target’ dividend D^*_it, and the actual payment made in the preceding year, D_i(t-1), D^*_it represents the dividends which the company would have paid in the current year if its dividend were simply based on its fixed target pay- out ratio r_i applied to current profits, D^*_it=r_iP_it and r is the target of payout ratio¹ with P_t current year’s profits after taxes and D_it and D_it-1 are the amounts of dividends paid in year t-1 and t by the firm i.”.

This model was designed starting from discussions with professionals and CEOs. Lintner points out that dividend policy is not uniform and underlines that:

• 
  managers think that firms must reach a long-term payout ratio;
  

¹ The “i” identifies the individual company.

• 
  profit is the main factor which explains dividend payment;
  
• 
  managers are reluctant to correlate dividend payout with firms’ profits;
  
• 
  managers are more focused on the rate of dividend payments and the way it changes over time than on the amount of dividend payments;
  
• 
  investment policy has only a slight influence on dividend policy.
  

2.