Variance decomposition of the country, industry, firm, and firm-year effects on dividend policy

Why some firms distribute generous cash dividends while others are reluctant to do so remains an unanswered question despite decades of scholarly examination. Although the extant literature on dividend policy has explored the effects of determinants at the country, industry, firm, and firm-year levels, it remains unclear whether and how much each level of analysis matters to dividend policy. Consequently, this study seeks to move the literature forward by decomposing the variance at each level associated with dividend policies in a global sample of 8903 firms over an 11-year time period. We employ hierarchical linear modeling and find that all four levels of analysis help to explain dividend policy, but the firm and firm-year effects account for the majority of variance. Furthermore, decomposing the variance within each year reveals that the firm level has the strongest effect on dividend policy. Finally, while the variance in dividend policy explained by each level varies according to the dividend policy measure used, it is largely stable over our study period. We discuss implications of these findings for future research on dividend policy and for the field of comparative corporate governance.