From 1978 to 1999, the proportion of publicly traded companies paying cash dividends fell from 66.5 percent to 20.8 percent. This period is distinguished by changing demographics of publicly traded companies. The authors find that although the changing demographics of the company population is important in explaining the declining proportion of dividend-paying companies, companies also now have a lower propensity to pay dividends. The lower propensity to pay is found after adjusting for company characteristics and is at least as important an explanatory factor as changed company demographics in explaining the authors' findings.
In the view of some finance theoreticians, dividends are less valuable to shareholders than capital gains because they are taxed at a higher rate. Presumably, then, companies that pay dividends have a higher cost of equity and are at a competitive disadvantage. Although many companies pay dividends, the historical evidence shows a decline in the percentage of publicly traded companies paying dividends during the past 20 or so years. From a high of 66.5 percent dividend payers among nonfinancial, nonutility companies in 1978, the percentage declined to 20.8 percent in 1999. The dividend decision is dependent on not only a company's characteristics and its ability to pay but also the willingness of management to pay dividends.
The authors address three questions regarding the decline in the percentage of dividend payers: What are the characteristics of dividend payers? Is the decline in the percentage of dividend payers the result of a decline in the prevalence of these characteristics in the company population? And have companies with dividend-paying characteristics become less likely to pay?
The authors obtain available data for 1926–1999 from the CRSP and Compustat
databases covering NYSE, Amex, and Nasdaq companies. For each year, they categorize
companies according to their dividend payment history:
The authors use summary statistics and logit regressions to identify the characteristics
The lower propensity to pay is general in nature but much stronger among companies that have never paid or that formerly paid dividends. Lower profitability and strong growth opportunities are associated with much lower expected rates of dividend initiation by companies that have never paid. Those companies that are dividend payers (large, profitable companies), however, have become only slightly more likely to stop paying dividends. The evidence suggests that the perceived benefits of paying dividends have declined over time. The authors suggest several motivations for the declining perceived benefits, including lower transaction costs that may encourage the sale of shares for consumption purposes and agency issues that lower the benefits of cash dividends (versus stock options use) in controlling these issues between stockholders and managers.