Workshop Series: Andrew Stark
Theory suggests that, under certain assumptions, corporate distributions should reduce market value on a one-to-one basis. This result is sometimes known as dividend displacement. Nonetheless, dividend displacement tends to be rejected by empirical tests for total dividends and regular dividends, but not for share buybacks, in the UK. This is associated with regular dividends having a stronger relationship with future earnings than share buybacks (that is, more information content). We study a conjecture in the literature that the omission of lagged accounting variables in accounting-based market value models is the cause of the rejection of dividend displacement for regular or total dividends. Our results suggest that this is not so, although lagged accounting variables are value relevant. When various controls for omitted variables in models used in prior literature are employed, it is in only one case that the results of prior studies are overturned. This case is when lagged market value is added into the estimated equation. Theoretically, within a general study of controlling for omitted variables in accounting-based market valuation models, we argue that including lagged market value as an independent variable cannot control for the omission of lagged accounting variables, or other omitted variables, without producing additional model mis-specification problems which, in turn, introduces bias into statistical tests. Qualitative analysis of the various empirical results suggests that the results concerning dividend displacement when lagged market value is included in the model are induced by coefficient bias. As a consequence, we conclude that the results in previous literature are robust to the inclusion of lagged accounting variables, and the evidence against these results when lagged market value is included in the model is unreliable.
Andrew Stark is currently the Coutts Professor of Accounting and Finance at Manchester Business School, having held prior faculty positions at Yale School of Management (visiting), and the universities of Essex, Ulster, Maryland and Manchester. He joined the School on 1 January 1996. He was given the British Accounting Association Distinguished Academic Award in 2003. He is currently one of the editors of the Journal of Business Finance and Accounting and is a past joint-editor of the British Accounting Review. He is a past chairperson of the British Accounting Association and the Conference of Professors of Accounting and Finance. He was a member of 2008 Research Assessment Exercise Main Panel I and the chairperson of Sub-Panel 35 (Accounting and Finance), having previously been on the Research Assessment Exercise Panels for Accounting and Finance in 1996 and 2001 and for Business and Management in 2001. He was chairperson of the Quality Assurance Agency Subject Benchmarking Group for Accountancy.