Lintner's Model

Lintner's Model

A model theorizing how a publicly-traded company sets its dividend policy. The model states that dividends are paid according to two factors. The first is the net present value of earnings, with higher values indicating higher dividends. The second is the sustainability of earnings; that is, a company may increase its earnings without increasing its dividend payouts until managers are convinced that it will continue to maintain such earnings.
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Following Lintner, many researchers explored other dividend determinants by extending/modifying Lintner's model. Dividend policies of individual firms were studied by Fama and Babiak (1968) by modifying Lintner's model.
(2010) in Oman by working on a selected sample firms using Lintner's model.
Authors tested extended Lintner's model using GMM estimator for data of 571 firms over a period of 8 years.
Benartzi, Michaely, and Thaler (1997), among others, conclude that "Lintner's model of dividends remains the best description of the dividend setting process available." Accordingly, this paper considers the extent to which the Lintner model characterizes the repatriation policies of multinational affiliates, paying particular attention to how foreign earnings translate into dividends.
The dummy variable approach is the used to test for any structural shift in the Lintner's model due to the regulatory change in taxes.
Table 6 reports the estimates of Lintner's model. Based on the results reported in this Table, we can make the following comments.
To detect whether a structural shift in the Lintner's model due to the 1996 tax imposition on distributed cash dividends, we introduced dummy variables into the model.
They find that the two best models were Lintner's model and a similar model with a lag term for earnings.
We start with the empirical fprm of Lintner's model specifiec in Equation 1.
If [d.sub.t] denotes the dividend payout at date t, then Lintner's model assumes that [DELTA][d.sub.t] [equivalent to] [d.sub.t] - [d.sub.t-1] = b[[d.sup.*.sub.t] - [d.sub.t-1]], where [d.sup.*.sub.t] is the target dividend, and 0 < b < 1 is the speed of adjustment coefficient.