TY  - JOUR
AU  - McDonald,Robert L.
AU  - Soderstrom,Naomi
TI  - Dividend and Share Changes:  Is There a Financing Hierarchy?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2029
PY  - 1986
Y2  - September 1986
UR  - http://www.nber.org/papers/w2029
L1  - http://www.nber.org/papers/w2029.pdf
N1  - Author contact info:
Robert L. McDonald
Department of Finance  Jacobs Center
Northwestern University
2001 Sheridan Rd.
Evanston, IL  60208-2006
Tel: 847-491-8344
Fax: 847-491-5719
E-Mail: r-mcdonald@northwestern.edu
M2  - featured in NBER digest on 1986-12-01
AB  - The most widely accepted empirical dividend model is that proposed by Lintner, who argued that firms smooth dividends over time. Many theoretical dividend models, however, either predict that dividends should be highly variable, or at least offer no support for the smoothing hypothesis. We use a switching regression model to test the Lintner model against an alternative which allows dividend behavior to differ depending upon whether or not firms are issuing shares. We reject the Lintner model, finding no evidence of dividend smoothing when firms are not issuing shares, and a high negative dividend growth rate when firms are issuing shares. This description of dividend behavior suggests the existence of a financing hierarchy in that the marginal source of finance differs over time. To further explore the financing hierarchy, we estimate logit models which explain the decisions by firms to change dividends, and to issue or repurchase shares. The results are consistent with the existence of a financing hierarchy.
ER  -