# Model Lintner

What is the Lintner model

In 1956, John Lintner, of Harvard University, Gund Professor of Economics and business administration a model of Lintner for corporate dividend policy , which focuses on two concepts: (1) the company’s target payout ratio dividend and (2) the speed at which current dividends adjust to the target.

The following formula describes the payments Mature corporations dividends:

∆Dividendt = κ + GAC (target Dividendt − Dividendt−1) + e; where

∆Dividendt change from the previous dividend for the period T – 1.

PAK < 1 is a partial correction factor

κ is a constant; and

et errors.

(Source)

From Lintner formula, the company’s Board of Directors (B of D), therefore, bases its decisions on the dividends of the company current net income, but adjusts them for certain systemic shocks, and gradually adapts to the changes in income over time.

The model of destruction ‘Lintner’

In 1956 John Lintner developed this model of dividends using inductive study with 28 large, public firms. Today, although Lintner has passed, his model remains a conventional starting point for understanding how companies behave dividends over time.

Two important things Lintner marked on corporate dividends policy:

1) companies tend to set long-term target dividend income by the sum of the positive net present value (NPV) projects they have available.

2) earnings increases are not always sustainable. As a result, the dividend policy will not significantly change until managers can see that new earnings levels are sustainable.

While all companies want to maintain a consistent dividend payout to maximize the wealth of shareholders, fluctuations in natural business of the group companies project dividends in the long term, based on a target dividend payout ratio.

The Lintner model and set up corporate dividends

The company’s Board of Directors (B of D) establishes dividend policy, including the amount of payment and the date(s) distribution. This is one case where shareholders are unable to vote for this corporate event (in contrast to cases such as mergers or acquisitions, and other important issues as compensation).

Three main approaches to corporate dividend policy include:

• This residual approachin which the payment of dividends out of the residual or remaining capital only after specific project capital requirements. (In such cases, companies rely on internally generated capital to Finance new projects.) Using the residual approach to dividends, as a rule, try to maintain balance in their debt/equity ratio before making any distributions.

• Approach to stability, where the Committee often specifies quarterly dividends per share annual revenue. This reduces uncertainty for investors and provides them with a permanent source of income.

• Hybrid and residual approach and the approach of stability, where the Board of the company a ratio of borrowed and own funds as a long-term goal. In these cases, companies usually decide on one set dividend, which is a relatively small part of annual income and can be easily maintained, as well as an additional dividend to distribute only when income exceeds General level.