It does so by comparing the financial performance of firms that issued scrip dividends over the period 1987-1992 to industry-matched control firms that paid only cash dividends.
A deeper understanding of the influences of these additional factors will enable us to understand why firms pay scrip dividends.
(1) Since scrip dividends increase the issued share capital, the total amount of dividends paid must be increased for the dividend-per-share to be increased or maintained.
(4) See Sections 230 and 249 to 251 of the Inland and Corporation Taxes Act 1988 (as amended) and Sections 141 and 142 of the Taxation of Chargeable Gains Act 1992 for the tax treatment of scrip dividends.
Recently, to alleviate this tax discrimination and to encourage tax-exempt investors to opt for scrip dividends, several companies have offered enhanced scrip dividends, whereby the basis for computing the equivalent number of shares is higher than the net cash dividend by up to 50%.
Although one year subsequent to the payment of scrip dividends may be too short a period, an extension may produce confounding effects and misspecification of long-horizon tests.
(15) I have also used other measures of cash shortage, such as interest cover and net cash flow from operations over interest paid, and find that companies that issue scrip dividends do not appear to be short of cash.
Lasfer, M.A., 1997, "Scrip Dividends: The Management's View," European Financial Management (forthcoming).
If a scrip dividend is used by managers to signal a favorable outlook to the market, then scrip-paying firms' subsequent earnings and dividends should be higher.
Table 5 reports the results from several multivariate logit regressions in which the dependent variable is one for scrip dividend firms and zero for the control firms.
I expect both these variables to be positively related to the probability of issuing a scrip dividend if this option is motivated by tax considerations.