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Keywords:

  • dividends;
  • payment frequency;
  • prospect theory

Abstract:  The joint contributions of prospect theory and mental accounting imply that investors receive a higher utility when a given level of dividends is paid more frequently, suggesting that dividends should be paid as often as possible. We document a strong positive relationship between payment frequency and firm value, confirmed with an event study of dividend payment frequency changes. Upon examining the frequency with which dividends are paid around the world, we discover that considerable variation exists, and that dividends are not paid as often as behavioral aspects suggest they should. From our multivariate analysis, we determine that non-behavioral factors such as the legal regime as well as the level and standard deviation of operating income exert significant influences on the payment frequency of dividends, suggesting that a tradeoff exists between behavioral and non-behavioral factors. The relationship between payment frequency and firm value remains robust in the presence of these non-behavioral factors.