what is the lintner 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 12though 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 the following formula describes a mature corporation s dividend payout d t k p a c t d t d t 1 e t where d dividend dividend t is the dividend at time t the change from the previous dividend at period t 1 pac pac 1 is a partial adjustment coefficient t d target dividend k a constant e t the error term begin aligned d t k pac td t d t 1 e t textbf where d text dividend text dividend t text is the dividend at time text t the change from the previous text dividend at period t 1 text pac text pac 1 text is a partial text adjustment coefficient td text target dividend k text a constant e t text the error term end aligned dt k pac tdt dt 1 et where d dividenddividendt is the dividend at timet the change from the previousdividend at period t 1 pac pac 1 is a partialadjustment coefficienttd target dividendk a constantet the error term in 1956 john lintner developed this dividend model through inductive research with 28 large public manufacturing firms 32 although lintner passed away years ago his model remains the accepted starting point for understanding how companies dividends behave over time 4lintner observed the following important facets of corporate dividend policies while all companies wish to sustain a constant dividend payout to maximize shareholder wealth natural business fluctuations force companies to project the dividends in the long run based on their target payout ratio from lintner s formula a company s board of directors thus bases its decisions about dividends on the firm s current net income yet adjusts them for certain systemic shocks gradually adapting them to shifts in income over time the lintner model and setting corporate dividendsa company s board of directors sets the dividend policy including the rate of payout and the date s of distribution this is one case in which shareholders are not able to vote on a corporate measure unlike a merger or acquisition and additional critical issues such as executive compensation the three main approaches to corporate dividend policy are as follows 