On the Dividend Policy of Electric Utilities

TLDR: The most widely held view in the recent literature is that companies are conservative in their financial policy, and, consequently, their dividend disbursement activity is characterized by a considerable degree of inertia, and more precisely, that there exists some "optimal" or "target" dividend payment (per share) to which corporations adhere.

Abstract: D URING the past twenty years a great deal of econometric research has been directed toward the study of the saving behavior of economic units. Thus, personal saving has been explored quite intensively through (personal) consumption studies, especially so in the post-war period. The question of corporate saving, however, has in large measure been neglected, although a casual look at the data would disclose that it has ranged in magnitude from about 300 per cent of personal saving in 1947 to just under 50 per cent in recent years. Undeniably, this is a very significant component of total savings. By corporate saving we mean, of course, undistributed profits; hence, this question could be studied equivalently by studying the dividend policies of firms. On the latter topic some studies have been made and some tentative hypotheses have been formulated. The most widely held view in the recent literature is that propounded by Lintner in his pioneering contribution, [2] and [3]. Lintner's hypothesis states that corporations are conservative in their financial policy, and, consequently, their dividend disbursement activity is characterized by a considerable degree of inertia, and more precisely, that there exists some "optimal" or "target" dividend payment (per share) to which corporations adhere. Departures from this level are made only reluctantly, following a change in the level of profits which is deemed to be more or less permanent. Lintner's statistical analysis is based on time series data pertaining to aggregate corporate dividend disbursements and profits. His model has dividends at time t, explained by dividends at time t 1, and profits at time t. This is not a very satisfactory approach, except for shortrun prediction (of aggregate dividends), since it fails to account for apparently wide (intertemporal) variations in the dividend policy of various corporations, and does not go sufficiently far in elucidating the motives and factors involved in deciding the amount of corporate profits to be retained.