Summary of Dividend Policy

Extensive research was conducted regarding three theories (lifecycle theory, signaling theory, catering theory) for explaining dividend policies. Among them, many researchers have supported lifecycle theory as the better recognized theory in explaining observed corporate cash dividend policies. The lifecycle theory states that established firms are likely to pay dividends than less established firms. For signaling theory, it states that firms may increase cash dividends as an indicator to investors that expected future cash flows have increased. Lastly, the catering theory states that demands of shareholders influence the company’s policies. Many researchers have refuted this theory, as it cannot fully justified dividend policies.

This study examines whether an ADR firm’s size, profitability, growth opportunities, earned and contributed capital mix, and macro-economic conditions in its home country are in relation to the profitability of the firm fitting into one of the five defined dividend paying classes (e.g. payer, non-payer, switcher). This study also examines whether characteristics of the same firm affect the likelihood of a dividend paying ADR firm’s decision to increase its dividend, decrease, or remain the same from the previous quarter.

Findings in this study are that ADRs simplify the process of investing in non-US firms by American investors. Factors in this study being identified as determinants of dividend policies of US and non-US firms, only somewhat explained the dividend policies of ADR firms. Results have shown that size, growth opportunities, earned and contributed capital mix, are related to the decision for consistent pay cash dividends by ADR firms. It also shown that increased in profitability reduce the risk that an ADR firm will decrease its dividend; whereas if poor economic conditions occurs in the home country, it increase the risk an ADR firm will decrease its dividend.