Lintner'S Model
The Lintner model is an economic formula for determining an optimal corporate dividend policy. It was proposed in 1956 by former Harvard Business School professor John Lintner and focuses on two core notions:Though originally a descriptive model intended to explain how firms are observed to set dividends, the model has also been used as a prescriptive model of how firms should set dividend policy.
Lintner Model
Definition
The Lintner Model is an economic formula for determining a company's optimal dividend policy. It was proposed by former Harvard Business School professor John Lintner in 1956, focusing on two core concepts: company earnings and target payout ratio. Initially, it was a descriptive model explaining how companies set dividends, but it has also been used as a prescriptive model to guide companies in formulating dividend policies.
Origin
The Lintner Model was proposed by John Lintner in 1956. Through empirical research on multiple companies, Lintner found that companies typically consider current earnings and target payout ratios when setting dividend policies and gradually adjust dividends to reach the target. This discovery led him to propose the Lintner Model to explain and guide the formulation of company dividend policies.
Categories and Characteristics
The Lintner Model is mainly divided into two categories: descriptive models and prescriptive models. Descriptive models explain how companies set dividend policies, while prescriptive models guide companies in formulating dividend policies. Its main characteristics include:
- Earnings Stability: Companies usually adjust dividends based on the stability of earnings.
- Target Payout Ratio: Companies set a long-term target payout ratio and gradually adjust dividends to reach this target.
- Adjustment Speed: Companies do not make large adjustments to dividends at once but do so gradually to avoid significant market impact.
Specific Cases
Case One: A company with stable earnings over the past few years sets a target payout ratio of 50%. According to the Lintner Model, the company will gradually adjust its dividends to reach the target ratio. For example, if the current payout ratio is 30%, the company may gradually increase dividends over the next few years until it reaches 50%.
Case Two: Another company with highly volatile earnings is more cautious in setting its dividend policy. According to the Lintner Model, the company will first ensure earnings stability before gradually adjusting dividends. For example, if the company's current earnings are unstable, it may temporarily maintain a lower payout ratio and gradually increase dividends once earnings stabilize.
Common Questions
Question One: Is the Lintner Model applicable to all companies?
Answer: The Lintner Model is mainly applicable to companies with relatively stable earnings. For companies with highly volatile earnings, other models may need to be considered.
Question Two: Must companies strictly follow the Lintner Model to formulate dividend policies?
Answer: The Lintner Model provides a guiding framework, but companies can adjust based on specific circumstances in practice and do not need to strictly follow the model.
