Payout Policy through the Financial Crisis

The following post comes to us from Eric Floyd, Nan Li, and Douglas Skinner, all of the Department of Accounting at the University of Chicago Booth School of Business.

Why managers pay dividends remains a puzzle. In our paper, Payout Policy through the Financial Crisis: The Growth of Repurchases and the Resilience of Dividends, which was recently made publicly available on SSRN, we report evidence on the payout policy of US financial and industrial firms over the past 30 years, including through the financial crisis, to shed new light on the why managers pay dividends. There are two specific goals. First, we investigate whether, as would be expected if share repurchases now dominate dividends as a means of paying cash to shareholders, managers used the financial crisis as a convenient excuse to stop paying dividends. Second, we use these data to provide new evidence on whether taxes, and in particular the Tax Relief Act of 2003 (which effectively eliminated the tax disadvantage of dividends) had a first order effect on payout policy.

We find that industrials and financials both increased payouts in the years prior to the crisis, at a pace that was impressive both in absolute terms and relative to earnings. Dividends reach a low point in 2002 but rebound thereafter. Although there is an increase in the fraction of dividend-payers immediately after the Tax Relief Act, we show that this is part of a broader increase in cash payouts that also includes a strong increase in repurchases. In the years after the Tax Relief Act there is no evidence of a shift in the mix of dividends and repurchases towards dividends—if anything, the reverse is true. Nor is there evidence of an increase in dividend payout ratios.

For industrials, dividends have increased steadily over time with payout ratios that are remarkably stable over the last 15 years. Industrials, and especially dividend payers, have increasingly used repurchases to supplement dividends, so that overall payouts (relative to earnings) have increased to levels that are very high by historical standards. This trend fueled the explosive growth of payouts through 2007, when industrials paid out 90% of aggregate earnings. During the crisis industrials cut back repurchases sharply but continued to pay dividends, with payout ratios largely unaffected by the crisis. Dividends and repurchases rebound strongly in 2010. We interpret this as evidence of the resilience of dividends as a payout mechanism.

Findings are similar for financials, although these firms generally exhibit a greater propensity to pay and increase dividends than industrials. Financials also exhibit growth in payouts over the last 15 years that is fueled by increased repurchases, culminating in explosive growth in payouts in the years prior to the crisis. Financials cut back dividends aggressively as the crisis takes hold, although they too evidence a reluctance to cut dividends at the beginning of the crisis, including for the TARP banks.

Overall, our evidence clearly demonstrates the staying power of dividends as well as the strong growth of repurchases. We argue that the resilience of dividends is unlikely to be driven by taxes; we interpret our evidence on payout policy over the last ten years as inconsistent with taxes having a first order effect on payout policy. Instead, it seems more likely that agency or behavioral explanations account for the strong persistence of dividends as a form of payout, and perhaps also for the massive increase in overall payouts.

The full paper is available for download here.

Other posts about: , , ,
Other posts from: , ,
Post a comment or leave a trackback: Trackback URL.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

  • Subscribe

  • Cosponsored By:

  • Supported By:

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    Daniel Fischel
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Barry Rosenstein
    Paul Rowe
    Rodman Ward