Differences in Dividend Policy across Countries

Figures 10.5 to 10.8 showed several trends and patterns in dividend policies at U.S. companies.4 They share some common features with firms in other countries, and there are some differences. As in the United States, dividends in other countries are sticky and follow earnings. However, there are differences in the magnitude of dividend payout ratios across countries. Figure 10.9 shows the proportion of earnings paid out in dividends in the G-7 countries in 1982-84 and again in 1989-91.

nini i i i i i i aSource: Rajan and Zingales

These differences can be attributed to:

1. Differences in Stage of Growth: Just as higher growth companies tend to pay out less of their earnings in dividends (see Figure 10.8), countries with higher growth pay out less in dividends. For instance, Japan had much higher expected growth in 1982-84 than the other G-7 countries and paid out a much smaller percentage of its earnings as dividends.

2. Differences in Tax Treatment: Unlike the United States, where dividends are double taxed, some countries provide at least partial protection against the double taxation of

4 Rajan, R. and L. Zingales, What do we know about capital structure? Some Evidence from International Data, Journal of Finance, 1995, v50, 1421-1460.

dividends. For instance, Germany taxes corporate retained earnings at a higher rate than corporate dividends.

3. Differences in Corporate Control: When there is a separation between ownership and management, as there is in many large publicly traded firms, and where stockholders have little control over managers, the dividends paid by firms will be lower. Managers, left to their own devices, have a much greater incentive to accumulate cash than do stockholders.

Not surprisingly, the dividend payout ratios of companies in emerging markets are much lower than the dividend payout ratios in the G-7 countries. The higher growth and relative power of incumbent management in these countries contribute to keeping these payout ratios low.

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