Do peer firms affect corporate payout decision: evidence from the JSE

Abstract

This study explores the effects of peer influence on payout decisions of South African listed firms. In recent years, the dividend puzzle debate has shifted to providing alternative stylised payout determinants, that gives more precise quantitative models which have power to reject weak theories, whilst reducing the gap between theoretical propositions and actual payout decisions. The study departs from a micro-environment perspective of firm-specific approach and adopts a holistic approach of peer effects which considers the market and macro environment of a firm, where integration, technological advancement and sophistication of markets have led firms to benchmark their decisions to peers as they battle for survival. Instrumental Variable Probit (IVP) regressions are used to estimate the potential peer effects dividends payments or share repurchase decisions. Additionally, Instrumental Variable Tobit (IV-Tobit) regressions are applied to evaluate peer effects on the amount of dividend, share repurchase and total payout. Instrumental variables (IVs) based on peers’ stock price shocks (peer idiosyncratic equity shock and peer idiosyncratic equity risk) are employed in the study to curb endogeneity problems. The residuals from the Five-factor model are used in the first stage regression, which gives the peer instrumented fitted value for predicting a firm’s pay out decisions in stage two regressions. Both instruments predict peers’ repurchases negatively (positively) and significantly, even after the control variables. Firms benchmark their dividend (repurchases) payments, dividend (repurchases) amount and payout ratios to those of their peers. Using Vector Autoregressive Models (VAR) models to check the robustness of peer influence on payout ratio adjustments, it is reported that a shock in peers indirectly affects a firm payout decision, significantly. Evidence from the eleven-day cumulative abnormal returns CAR (-5,+5) around dividend announcements shows that the CAR are more pronounced in firms whose payout ratios are closer to peers. The study found that peer influence is more pronounced on the JSE compared to Nasdaq due to higher risk premiums associated with the market. The significant peer influence documented for JSE firms is more pronounced for dividends than share repurchases