Asian Review of Financial Research

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eISSN: 2713-6531

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Asian Review of Financial Research Vol.29 No.4 pp.495-519
Dividend Policy and Permanence of Earnings
Sungmin Kim1†
1 한양대학교 경상대학 교수
Yongwon Jang1†
1 한양대학교 산업경영연구소 연구교수
Key Words : 배당정책; 이익의 지속성; 지속적인 이익; 일시적인 이익; 베버리지-넬슨; Dividend Policy; Earnings Permanence; Permanent Earning; Transitory Earning; Beveridge and Nelson


This paper investigates the effect of permanence of firm's earning on the dividend policy of Korean firms. We decompose earnings into a transitory component and a permanent one, employing the approach of Beveridge and Nelson (1981). We focus on the relation between dividends and permanent earnings. Lee (1996) presented the empirical results that dynamic dividend behavior was more accounted for primarily by changes in permanent earnings rather than current earnings, using aggregate time-series data for the Standard and Poor's composite Stock Price Index. We use firm-level panel data and test hypothesis that Korean firm's dividend decisions also depend more on permanent earnings rather than transitory earnings. We find that the permanent earning has a significantly positive relationship with dividend and the coefficient estimate of permanent earnings is larger than that of transitory earnings. Future more, we use cash flows as earnings variable and find the similar results. There is a significantly positive relationship between permanent cash flows and dividends. And the marginal effect of permanent cash flows on dividends is significantly larger than that of transitory cash flows on them. These empirical results show that Korean firms take into consideration of permanence of earnings more in making their dividend decisions.
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