The Market Valuation Hypothesis of Dividend Policy: New Evidence from Japan

Abstract

This paper explores the determinants of the dividend policy in Japan. First, our empirical investigations reveal that in contrast to the US case, the dividend premium is neither the determinant of the dividend initiations nor the continuations of the Japanese firms. Second, we newly find that the strong determinants of the Japanese firms’ dividend initiations are the nonpayers’ same year’s and previous year’s market-to-book ratios. In addition to the above, we also reveal that the strong determinants of the Japanese firms’ dividend continuations are the payers’ same year’s and previous year’s market-to-book ratios. These results clearly support our new hypothesis, the market valuation hypothesis of the dividend policy in Japan, and demonstrate our novel contributions of this study. Furthermore, our empirical results also indicate that the Japanese corporate managers can foresee their own firms’ earnings for at most two years ahead. We consider that this evidence may not be consistent with the traditional signaling hypothesis of dividend policy.