We show that a certain class of progressive tax structure induces an optimal dividend The theoretical model is consistent with empirically observed dividend policies.
policy which is autoregressive
in nature.
1. Introduction A classic paper by Lintner (1956) provided the empirical observation that dividend depends in part on the firm’s current earnings and in part on the dividend for the previous year. Fama and Babiak (1968) confirmed this observation in a study of 392 companies in the United States between 1946 and 1964. They found that the frequency of a dividend increase depended on both the number of occasions on which earnings had risen and on how recently these had risen. The evidence suggested the following empirical model for the determination of dividend policy: D ItI =XE,+,+(l-X)D,,