Linter Analysis

Does Lintner’s dividend model explain South African dividend payments?

HP Wolmarans Department of Financial Management University of Pretoria

Abstract It is generally accepted that the payment of dividends is the most important and most widely used instrument for the distribution of value to shareholders. Shareholders also prefer to receive regular dividends rather than irregular cash payments. A well-known model that attempts to explain dividend policy is that of Lintner (1956). This study investigates whether Lintner’s model can be used to explain South African dividend payments and compares this model with another, less sophisticated, model, namely the “percentage model”. Lintner’s model does not have a very good fit, probably as a result of the small sample used. Nearly half of the 200 largest companies that are listed on the Johannesburg Securities Exchange were excluded from the study as they were not listed for a sufficiently long period. Other companies were excluded on the grounds of having maintained their dividends on the same level for at least two consecutive years. Key words Dividend policy Dividend decision Lintner’s dividend model

1 Introduction

The dividend decision is widely regarded as one of the most important financial decisions to be taken from a strategic point of view. The dividend decision, which is determined by a firm’s dividend policy, affects the level of equity retained in a firm (Lease, John, Kalay, Loewenstein and Sarig 1999:1). If dividends that are paid out are not replaced in value terms by new equity, then this decision also influences the financial structure of the firm, at least briefly. The importance of a dividend decision is therefore based on the fact that it has implications for both the investment decisions and the financing decisions that are taken. The more cash that a firm pays out in the form of dividends, the less

Meditari Accountancy Research Vol. 11 2003 : 243–254 243

Does Lintner’s dividend model...