i think there can be no exact and absolute relation between the two. dividend policy may be dependent on may other factors like market thinking.

From my point of view there is no dependence between the life cycle and dividend policy. Maybe you can explain the dividend policy by other variables like competition in market, the need of innovation in industy (reinvest the profit in research, developement, equipement), profit, corporate governance policy,  etc.

I think there will be a relation between life cycle and dividend policy. A typical firm invests when it is young and growing. Correspondingly, it will pay no (or low) dividends because cash flows may be low relative to capital expenditure (or R&D expenditure). As the firm matures and earns higher and more stable cash flows, it may then start to pay dividends. The relation between life cycle and dividend is thus mediated by the cash flows and the investment policy of the firm. 

every stage in the firm life cycle has its characteristics, one of these is profitability. however, there are many variables affect dividends policy, you can try to examine this relationship. you can return back to management literature and find suitable theoretical basis.

yes, I have scrutinized the relationship between dividends payout and the life-cycle of a firm, evidence from GCC listed firms, to see how the probability of paying dividends changes with the financial life-cycle of the firm. I found that well-established firms tend to be good candidates to pay cash dividends while small firms the reverse. Non-payer firms with low/profitability and higher attractive investment opportunities tend to retain their cash flows i.e. do not pay dividends. I observe a highly significant relation between the decision to pay dividends and the financial life-cycle of the firm... Evidence in support of a life-cycle theory of dividends is found by DeAngelo et al., 2006 and Denis and Osobov, 2008.

I totally agree with Eric Theissen.

Consistent with a life cycle theory of dividends, the fraction of publicly traded firms that pay dividend is high when retained earnings are a large portion of total equity and falls to near zero when most equity is contributed rather than earned.

All evidence supports the life cycle theory of dividends in which a firm's stage in that cycle is well-proxied by its mix of internal and external capital.

Thank you all for your inputs. Your answers reveal that 'life cycle theory' explain some known facts about dividend policy. 

Together with colleagues we tested the life cycle theory in a sample of Canadian firms listed on TSX in yrs 2001-2012, these were 811 non-financial and non-utility firms.

The proxy to determine the stage in the life cycle was earned/contributed capital mix. We tested the influence of the proxy and control variables on the decision to pay out dividends. The results suggested that the decision is to a large extent influenced by the ratio of retained earnings to total assets and the firm's size; this supports the life cycle theory of dividends. We also found that capital mix variables influence the decision more than size measures. Additionally, the concept of "sticky" dividends was well supported in our sample. 

In the paper we applied statistical methods designed by DeAngelo, DeAngelo & Stulz (2006) and Fama& French (2001). 

Hi,

You may benefit from reading this paper:

Harada K, Nguyen P, 2011, "Ownership concentration and dividend Policy in Japan", Managerial Finance, 37, p 362 -379.

Best regards

It can not be said with full confidence as the answer to what is mature firm? can be different in different settings (geographically, sector etc). there are also competing theories like Catering theory of dividends which claim their payment is triggered by investors demand. 

HI,

For sure a young firm with a lot of investments opportunities will not be able to distribute dividends. After its rapid growth, when the firm comes to maturity it is possible and as you said required by the shareholders. You can check this paper and benefit from it.

Best regards

Dear All,

It is true that dividend policy varies from one firm to another. Also, while considering young firm, I agree with Patrick and his text sounds good. For a young firm there is a cycle, but I believe that the duration of its phases varies from one firm to another according to different factors (sector, size, demand effect, etc).

This phenomenon has been mentioned and tested since 1998 by Driffil and Sola for US firms. It was their reply to Froot and Obstfeld (1991) who suggested the presence of an Intrinsic bubble in the US stock market. The authors, rejected this assumption and justifies the deviation of the SP500 from its fundamental value by the important variation oof dividends over this period. In their paper, they showed that dividend dynamics exhibits nonlinearity that can be reproduced by a Markov switched model. Their paper is available at:

https://www.researchgate.net/publication/223690052_Intrinsic_bubbles_and_regime-switching

Best Regards,

Fredj,

Article Intrinsic bubbles and regime-switching

Two separate questions pertain to a firm's dividend policies: 1) why do firms pay dividend at all? and 2) why do investors react the way they do when a firm changes its dividend payout? Both issues are unresolved, especially the first questions. Interested readers are invited to read Fisher Black's "Dividend Puzzle." Life Cycle Theory may explain it somewhat but maybe only a small portion of it. As one of the above writers says---how do you define a "mature" firm? If you define it as a firm with zero growth (or very low growth), then someone may correctly say that the reason firms continuously invest in research and development (or strategies), is that they want to avoid reaching the xero-growth period. 

Several theories have attempted to explain why investors behave the way they do (an example, positive market reaction to announcements of unexpected dividend increases) . Two main ones are Free Cash Flow Theory and Signaling Theory. The FCF theory seems to have a slight edge.

HI,

You may have a look to this paper. Many other factors may interact such as uncertainty around tax policy changes...

B G Buchanan, C Cao, E Liljeblom, S Weihrich, "Uncertainty and firm dividend policy- A natural Experiment"', Journal of Corporate Finance, 2017, 42, p 179 -197.

Best regards

Yes....its true but some extent....the stage of a business in its life cycle will partly determine the level of dividends....a young and growing business May need to Reinvest a lot hence high retention of profits and low on no dividend distribution.....but a mature firm with low growth prospects and May be headed for decline May not retain profits hence more dividends given out 

Hi,

There is a new paper of interest for you:

Wen He, Lilian Ng, Nataliya Zaiats, Bohui Zhang "Dividend policy and earnings management across countries"' Journal of Corporate Finance  (in press),November 2016, forthcoming.

Best regards 

Hi,

Here is another one:

Corporate payout smoothing: A variance decomposition approach

Journal of Empirical Finance January 2016 Pages 1-13

Edward C. Hoang, Indrit Hoxha

Best regards