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Reappearing Dividends

Authors

  • Brandon Julio,

    1. brandon julio is a doctoral student in the Finance Department at the University of Illinois at Urbana-Champaign.
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      We appreciate the comments of Malcolm Baker, Sean Brady, Don Chew, Don Delves, John Graham, Robin Greenwood, Margo Loeble, Tim Opler, Richard Passov, Neil Pearson, Josh Pollet, Mike Weisbach, Ivo Welch, Josh White, Kent Womack, and participants at the Forum of Corporate Finance, May 2004. We extend special appreciation to Bill Aronin and Joe Gits from Quantitative Analytics (qaisoftware.com) who were quite helpful with data needs, especially in allowing access to very recent data.

  • David L. Ikenberry

    1. david ikenberry is Department Chair and Professor of Finance at the University of Illinois at Urbana-Champaign.
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      We appreciate the comments of Malcolm Baker, Sean Brady, Don Chew, Don Delves, John Graham, Robin Greenwood, Margo Loeble, Tim Opler, Richard Passov, Neil Pearson, Josh Pollet, Mike Weisbach, Ivo Welch, Josh White, Kent Womack, and participants at the Forum of Corporate Finance, May 2004. We extend special appreciation to Bill Aronin and Joe Gits from Quantitative Analytics (qaisoftware.com) who were quite helpful with data needs, especially in allowing access to very recent data.


Abstract

During the last two decades of the 20th century, the propensity of U.S. companies to pay cash dividends declined significantly. The trend away from dividends accelerated during the late 1990s, leading some economists to conclude that dividend policy was shifting in a very fundamental way. But there was a sharp reversal in this trend starting in 2000.

This article investigates five possible explanations why dividends are reappearing. Given the explosion of new companies during the 1990s, the authors find that part of this rebound can be explained by the “maturity hypothesis”– by the need for such companies to pay out their excess “free cash fiow” to reassure investors that it will not be wasted on value-destroying investments. The authors also report evidence that some companies have chosen to use dividends in part to restore investor confidence about the “quality” of corporate earnings in the wake of concerns over corporate governance. Third, the authors' findings suggest that U.S. companies have responded to the recent dividend tax cut, as one might expect, although the rebound in dividends started well before tax reform became a widely discussed possibility. Finally, the study finds little support for behavioralist explanations in which managers “cater” to irrational investor preferences for dividends. Although the authors hesitate to read too much into the recent rebound, their evidence is consistent with the idea that corporate payout policy has shifted back in favor of conventional cash dividends.

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