Volume 30, Issue 1, 2021
DOI: 10.24205/03276716.2020.2043
Effect of Mispricing and Growth Opportunity on Dividend Policy: Evidence from Market-to-Book Ratio Decomposition
Abstract
This paper investigates the effect of mispricing and growth opportunity on dividend policy by decomposing the market-to-book ratio into mispricing and growth components. Our results could be summarized as follow. First, the higher the market-to-book ratio would decrease the probability of the decision to pay cash dividends. Also, this paper figures out that the relationship between the mispricing and the probability of paying cash dividends is negative; plus, the growth opportunity has a positive effect when a company decide to pay a cash dividend. Second, both the mispricing and growth opportunity have positive effect when manager decide the amount of dividend. The manager would cater to the investor's demand and signify the growth opportunity when deciding how much money they will payout.Third, the mispricing performs a positive effect on the probability of the company pay stock dividends and transfer of reserve to common shares, and the growth opportunity is not significant, implying that the manager is prone to market timing when paying the stock dividend. Finally, this paper finds that both the overvaluation and undervaluation would decrease the probability of paying cash dividend, offering a new topic for future research by decomposing market-to-book ratio.
Keywords
Dividend Policy; Mispricing; Growth Opportunity; Signaling; Market Timing