Title: Variable-ordering induced problems of impulse-response analysis and other difficulties: the dividend policy of Austrian firms

Authors: Tobias Basse, Sebastian Reddemann

Addresses: Norddeutsche Landesbank (NORD/LB), Friedrichswall 10, D-30159 Hannover, Germany. ' Center for Risk and Insurance, Leibniz Universitat Hannover, Konigsworther Platz 1, D-30167 Hannover, Germany

Abstract: Orthogonalised impulses are the standard way to isolate shocks to variables in a vector error correction model. While using the Cholesky decomposition to adjust interdependencies of the shocks, the ordering of the variables on the stage of estimation has a great impact on the resulting impulse response functions. It is shown how the variable ordering affects the empirical evaluation of the dividend policy of Austrian firms examining corporate earnings, dividends and inflation. Additional problems are discussed (e.g., bootstrapped confidence intervals and seasonal adjustment procedures, missing variables). The paper has two messages: it is a fatal flaw of any economic model to omit important variables. Moreover, it is also of major importance to use appropriate econometric modelling techniques.

Keywords: corporate earnings; dividend policy; smoothing; variable ordering; cointegration; impulse response functions; Austria; dividends; signalling; inflation; econometric modelling.

DOI: 10.1504/IJCEE.2010.037938

International Journal of Computational Economics and Econometrics, 2010 Vol.1 No.3/4, pp.278 - 293

Published online: 05 Jan 2011 *

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