FIN-02-056 |
NYU Stern School of Business |
Why are dividends disappearing? An empirical analysis
November 2002
Malcolm Baker and Jeffrey Wurgler
ABSTRACT
We investigate the causes of time-series fluctuations in the propensity to pay dividends,
including the post-1978 decline documented by Fama and French (2001). We consider
explanations based on fluctuations in dividend clienteles, agency problems, information
asymmetries, executive stock options, catering incentives, tax code awareness, and
short-lived idiosyncratic factors. To evaluate these explanations, we conduct three
styles of analysis. First, we count and classify influences on the propensity to pay that
were noted in the financial press. Second, we examine time-series relationships
between the propensity to pay and proxies for the driving influences in the candidate
explanations. Third, we assess whether the candidate explanations are theoretically
compatible with related time-series patterns involving dividend policy. Overall, the
results are most consistent with the catering explanation. Notably, catering incentives,
as measured by the stock market "dividend premium," roughly line up with the four
trends in the propensity to pay between 1963 and 2000 and are able to account for the
observed magnitude of the post-1978 decline. There is also evidence that idiosyncratic
factors, including the Nixon-era dividend controls and the recent growth in options,
affected the propensity to pay in specific periods.
Malcolm Baker
Institution: Harvard Business School
Email: mbaker@hbs.edu
Jeffrey Wurgler
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0367
Fax: (212) 995-4233
Email: jwurgler@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~jwurgler/
To download a copy of this paper click here
To request a copy of this paper click here
|