Table 1 provides the MicroExstat industrial classification of firms in the test and control samples.(9) Column 3, Table 1, reports the number of companies in each industry group that paid scrip dividends. Column 4 shows the proportion of these firms relative to the total number of companies listed in each of these industries.
Three proxy variables capture the taxation impact on the decision to issue scrip dividends. The first is the ratio of the reported recoverable ACT to the firm's market value of equity.
Moreover, if firms in financial distress issue scrip dividends, their capacity to raise external finance should be lower -- and their leverage higher -- than that of control firms.
Tobin's q, defined as the ratio of market value of equity plus book value of debt to total assets (e.g., Opler and Titman, 1993), is used to measure growth opportunities.(12) As in Lang, Stulz, and Walkling (1991), a variable identifying firms that simultaneously have low investment opportunities and high cash flow is constructed to separate the free-cash-flow explanation of scrip dividends from the cash-shortage proposition.
To test for the tax impact on the decision to pay scrip dividends, I first classify all companies in the test and control samples into relative ACT recoverable and overseas sales quintiles.
Firms that issue scrip dividends do not report larger recoverable ACT, do not have lower taxable profits, and do not generate higher overseas sales than the control firms.
Firms that pay scrip dividends appear to be highly levered and exhibit significantly higher dividend yields than does the control group.
The results show that there are statistically significant differences in the growth opportunities and size between firms that pay scrip dividends and those that do not.
Panel D of Table 4 shows that there is no significant difference in the subsequent period's growth in earnings between firms that pay scrip dividends and those that do not.
First, since scrip dividends are announced at the same time as earnings, the announcement-date abnormal returns are likely to be affected by other factors contained in the reports, not linked to the scrip option at all.
The above cross-sample differences suggest that taxation, financial distress, and signaling are less important motives behind the decision to issue scrip dividends. The cash flow hypothesis is by far the most important determinant of such a financial decision.