engleski

Sensitivity of Dividends to Earnings Changes

This paper deals with probabilities of dividend changes for a given changes in earnings. This so-called sensitivity of dividends to earnings changes was analysed, on a sample of Advanced economies and Emerging and developing economies, according to International Monetary Fund classification. The main goal of the research is to empirically verify the assumption that companies are generally reluctant to cut or reduce dividends regardless of the stage of economic development of the countries. In addition, the probabilities of dividend changes for a given change in earnings in characteristic groups of countries - Baltic countries and former Yugoslavia countries - have been analyzed. Research results show that earnings are significant dividend factor in all sample countries, that companies are generally reluctant to cut or decrease dividends and that dividends are less sensitive to earning changes in Advanced economies, compared to Emerging and developing economies. Research has also shown that dividends are less responsive to earnings changes in former Yugoslavia countries compared to Baltic countries. These findings are in line with Lintner (1956) who has shown that reduction in earnings is not necessarily followed by reduction in dividends. Such behavior dividends can be explained even by prospect theory created by Kahneman and Tversky (1979). They have shown that investors do not make decision in relation to the overall wealth but in relation to a particular reference point, which is usually the status quo. If this is the case, the previous dividends represent a specific reference point in relation to which investors make decision. Having in mind asymmetric reaction of the investing public to dividend increases and dividend decreases (or dividend cut), companies are reluctant to cut or decrease dividend because they are trying to avoid negative market reaction.

dividends, earnings, sensitivity, probability analysis

prvi puta objavljeno u ZBORNIK RADOVA, Journal of Economy and Business, Special Issue