Dividend Policy in Regulated Network Industries: Evidence from the EU

We study the dividend policy of firms in regulated network industries, focusing on the impact of different regulatory regimes and government control. We link payout and smoothing decisions to different regulatory mechanisms (cost-based vs. incentive regulation) and state vs. private ownership. We test our predictions on a panel of listed European electric utilities, accounting for potential endogeneity of the choice of regulatory and ownership patterns. We find that incentive-regulated firms smooth their dividends less than cost-based regulated firms and that they report higher target payout ratios. Consistent with the interest group theory of regulation, we find that incentive regulation schemes are less likely when the state is still an important shareholder in the sector. Additionally, our results show that government control undermines the efficiency-enhancing effects of incentive regulation on dividend policy, e.g. lower smoothing is only due to private firms.