Article co-authored by SOAS Professors republished in special issue

An article co-authored by SOAS Professors Ciaran Driver and Pasquale Scaramozzino has been republished in a special issue of the most cited articles in the last 5 years.

There is a long-standing belief that UK-based companies are more oriented to short-term returns to shareholders and less so to retaining funds for innovation and growth. The stereotype is backed by cultural references such as the fictional character played by Jared Harris’ cost-cutting executive in Madmen. But is there evidence for this view of British companies and managers as eager to extract profit at every turn and return it to shareholders as dividends? 

An academic paper published by two SOAS professors Ciaran Driver and Pasquale Scaramozzino, and Anna Grosman from Loughborough, has shown that there is data to back this up. In an open-access publication , they  proposed an alternative explanation for dividends to the more traditional agency theory, which they call investor pressure and they analyse three main channels of influence for this that feature in company decisions. 

These are: pressure arising from fear of takeovers; pressure arising from stricter formal governance standards; and pressure through institutional short-term trading. They find that firms are more generally inclined to prefer dividends to reinvestment even where fundamentals favour the former.

Now their paper has been re-issued in a special issue of the top-20 economics journal: Economic Modeling  which gathers together the most cited papers in the last five years, this one being at number 5.  In fact, the main thrust of this paper has been echoed also by others. It is not just the well-publicised case of excess dividends being paid by British water industry firms. 

Former Bank of England Chief Economist has also noted current low rates of investment which he attributes to accountancy standards, noting that “The primary driver of this investment drag has been the rise in payouts (dividends and buybacks) to shareholders.” In an opinion given recently to the Financial Times by a senior UBS analyst,  low profitability in the UK,  while attributable to poor management “is exacerbated by the UK’s excessive focus on dividends over growth, and the ensuing risk aversion.”

The issue of company payout remains topical and more recently the authors of this study have been working on a study of South African dividends in cooperation with the South African Reserve Bank and the South African Treasury.