JOURNAL OF Financial ECONOMICS ELSEVIER Journal of Financial Economics 60(2001)3-43 www.elsevier.com/locate/econbase Disappearing dividends:changing firm characteristics or lower propensity to pay? Eugene F.Fama,Kenneth R.Frenchb.* "Graduate School of Business,University of Chicago,Chicago.IL 60637.USA Sloan School of Management,Massachusetts Institute of Technology.Cambridge.MA 02142.USA Received 7 January 2000;accepted 17 August 2000 Abstract The proportion of firms paying cash dividends falls from 66.5%in 1978 to 20.8% in 1999,due in part to the changing characteristics of publicly traded firms.Fed by new listings,the population of publicly traded firms tilts increasingly toward small firms with low profitability and strong growth opportunities -characteristics typical of firms that have never paid dividends.More interesting,we also show that regardless of their characteristics,firms have become less likely to pay dividends. This lower propensity to pay is at least as important as changing characteristics in the declining incidence of dividend-paying firms.C 2001 Published by Elsevier Science S.A. JEL classification:G35;G32 Keywords:Dividends;Payout policy;Stock repurchases;New listings *We acknowledge the comments of John Graham,Douglas Hannah,Anil Kashyap,Tobias Moskowitz G.William Schwert (the editor).Andrei Shleifer.Janice Willett.Paul Zarowin.and seminar participants at Harvard University,the University of Chicago,the National Bureau of Economic Research,the University of Rochester,and Virginia Polytechnical Institute.The referees, Harry DeAngelo and Rene Stulz,were particularly helpful. Corresponding author. E-mail address:kfrench@mit.edu (K.R.French). 0304-405X/01/S-see front matter C 2001 Published by Elsevier Science S.A Pl:S0304-405X(01)00038.-1
We acknowledge the comments of John Graham, Douglas Hannah, Anil Kashyap, Tobias Moskowitz, G. William Schwert (the editor), Andrei Shleifer, Janice Willett, Paul Zarowin, and seminar participants at Harvard University, the University of Chicago, the National Bureau of Economic Research, the University of Rochester, and Virginia Polytechnical Institute. The referees, Harry DeAngelo and ReneH Stulz, were particularly helpful. * Corresponding author. E-mail address: kfrench@mit.edu (K.R. French). Journal of Financial Economics 60 (2001) 3}43 Disappearing dividends: changing "rm characteristics or lower propensity to pay? Eugene F. Fama, Kenneth R. French* Graduate School of Business, University of Chicago, Chicago, IL 60637, USA Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, USA Received 7 January 2000; accepted 17 August 2000 Abstract The proportion of "rms paying cash dividends falls from 66.5% in 1978 to 20.8% in 1999, due in part to the changing characteristics of publicly traded "rms. Fed by new listings, the population of publicly traded "rms tilts increasingly toward small "rms with low pro"tability and strong growth opportunities } characteristics typical of "rms that have never paid dividends. More interesting, we also show that regardless of their characteristics, "rms have become less likely to pay dividends. This lower propensity to pay is at least as important as changing characteristics in the declining incidence of dividend-paying "rms. 2001 Published by Elsevier Science S.A. JEL classixcation: G35; G32 Keywords: Dividends; Payout policy; Stock repurchases; New listings 0304-405X/01/$ - see front matter 2001 Published by Elsevier Science S.A. PII: S 0 3 0 4 - 4 0 5 X ( 0 1 ) 0 0 0 3 8 - 1
4 E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 1.Introduction Dividends have long been an enigma.Since they are taxed at a higher rate than capital gains,the common presumption is that dividends are less valuable than capital gains.In this view,firms that pay dividends are at a competitive disadvantage since they have a higher cost of equity than firms that do not pay. The fact that many firms pay dividends is then difficult to explain. Using CRSP and Compustat,we study the incidence of dividend payers during the 1926-99 period,with special interest in the period after 1972,when the data cover NYSE,AMEX,and NASDAQ firms.The percent of firms paying dividends declines sharply after 1978.In 1973,52.8%of publicly traded non- financial non-utility firms pay dividends.The proportion of payers rises to a peak of 66.5%in 1978.It then falls rather relentlessly.In 1999,only 20.8%of firms pay dividends. The decline after 1978 in the percent of firms paying dividends raises three questions.(i)What are the characteristics of dividend payers?(ii)Is the decline in the percent of payers due to a decline in the prevalence of these characteristics among publicly traded firms,or(iii)have firms with the characteristics typical of dividend payers become less likely to pay?We address these questions. We use logit regressions and summary statistics to examine the characteristics of dividend payers.Both approaches suggest that three characteristics affect the decision to pay dividends:profitability,investment opportunities,and size. Larger firms and more profitable firms are more likely to pay dividends. Dividends are less likely for firms with more investments. The summary statistics provide details on the nature of dividend payers, former payers,and firms that have never paid.Former payers tend to be distressed.They have low earnings and few investments.Firms that have never paid dividends are more profitable than former payers and they have strong growth opportunities.Dividend payers are,in turn,more profitable than firms that have never paid.But firms that have never paid invest at a higher rate,do more R&D,and have a higher ratio of the market value of assets to their book value (V/A,,a proxy for Tobin's O)than dividend payers.The investments of dividend payers are on the order of pre-interest earnings,but the investments of firms that have never paid exceed earnings.Finally,payers are about 10 times as large as non-payers. The decline after 1978 in the percent of firms paying dividends is due in part to an increasing tilt of publicly traded firms toward the characteristics of firms that have never paid-low earnings,strong investments,and small size.This tilt in the population of firms is driven by an explosion of newly listed firms,and by the changing nature of the new firms.The number of publicly traded non-financial non-utility firms grows from 3,638 in 1978 to 5,670 in 1997,before declining to 5,113 in 1999.Newly listed firms always tend to be small,with extraordinary investment opportunities (high asset growth rates and high V/A,).What
1. Introduction Dividends have long been an enigma. Since they are taxed at a higher rate than capital gains, the common presumption is that dividends are less valuable than capital gains. In this view, "rms that pay dividends are at a competitive disadvantage since they have a higher cost of equity than "rms that do not pay. The fact that many "rms pay dividends is then di$cult to explain. Using CRSP and Compustat, we study the incidence of dividend payers during the 1926}99 period, with special interest in the period after 1972, when the data cover NYSE, AMEX, and NASDAQ "rms. The percent of "rms paying dividends declines sharply after 1978. In 1973, 52.8% of publicly traded non- "nancial non-utility "rms pay dividends. The proportion of payers rises to a peak of 66.5% in 1978. It then falls rather relentlessly. In 1999, only 20.8% of "rms pay dividends. The decline after 1978 in the percent of "rms paying dividends raises three questions. (i) What are the characteristics of dividend payers? (ii) Is the decline in the percent of payers due to a decline in the prevalence of these characteristics among publicly traded "rms, or (iii) have "rms with the characteristics typical of dividend payers become less likely to pay? We address these questions. We use logit regressions and summary statistics to examine the characteristics of dividend payers. Both approaches suggest that three characteristics a!ect the decision to pay dividends: pro"tability, investment opportunities, and size. Larger "rms and more pro"table "rms are more likely to pay dividends. Dividends are less likely for "rms with more investments. The summary statistics provide details on the nature of dividend payers, former payers, and "rms that have never paid. Former payers tend to be distressed. They have low earnings and few investments. Firms that have never paid dividends are more pro"table than former payers and they have strong growth opportunities. Dividend payers are, in turn, more pro"table than "rms that have never paid. But "rms that have never paid invest at a higher rate, do more R&D, and have a higher ratio of the market value of assets to their book value (< /A , a proxy for Tobin's Q) than dividend payers. The investments of dividend payers are on the order of pre-interest earnings, but the investments of "rms that have never paid exceed earnings. Finally, payers are about 10 times as large as non-payers. The decline after 1978 in the percent of "rms paying dividends is due in part to an increasing tilt of publicly traded "rms toward the characteristics of "rms that have never paid } low earnings, strong investments, and small size. This tilt in the population of "rms is driven by an explosion of newly listed "rms, and by the changing nature of the new "rms. The number of publicly traded non-"nancial non-utility "rms grows from 3,638 in 1978 to 5,670 in 1997, before declining to 5,113 in 1999. Newly listed "rms always tend to be small, with extraordinary investment opportunities (high asset growth rates and high < /A ). What 4 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43
E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 changes after 1978 is their profitability.Before 1978,new lists are more profit- able than seasoned firms.In 1973-77,the earnings of new lists average a hefty 17.79%of book equity,versus 13.68%for all firms.The profitability of new lists falls throughout the next 20 years.The earnings of new lists in 1993-98 average 2.07%of book equity,versus 11.26%for all firms. The decline in the profitability of new lists is accompanied by a decline in the percent of new lists that pay dividends.During 1973-77,one-third of newly listed firms pay dividends.In 1999,only 3.7%of new lists pay dividends.The surge in numbers and the changing nature of new lists produce a swelling group of small firms with low profitability but large investments that have never paid dividends.This group of firms is a big factor in the decline in the percent of firms paying dividends. It is perhaps obvious that investors have become more willing to hold the shares of small,relatively unprofitable growth companies.But the resulting tilt of the publicly traded population toward such firms is only half of the story for the declining incidence of dividend payers.Our more striking finding is that firms have become less likely to pay dividends,whatever their characteristics. We characterize the decline in the likelihood that a firm pays dividends,given its characteristics,as a lower propensity to pay.What we mean is that the perceived benefits of dividends(whatever they are)have declined through time. We use two approaches to quantify how characteristics and propensity to pay combine to produce the decline in the percent of dividend payers.One approach works with logit regressions.The other uses relative frequencies of payers in portfolios formed on profitability,investment opportunities,and size.Both approaches say that lower propensity to pay is at least as important as changing characteristics in explaining the decline in the percent of dividend payers. Lower propensity to pay is quite general.For example,the percent of dividend payers among firms with positive earnings declines after 1978.But the percent of payers among firms with negative earnings also declines.Small firms become much less likely to pay dividends after 1978,but there is also a lower incidence of dividend payers among large firms.Firms with many investment opportunities become much less likely to pay dividends after 1978,but dividends also become less likely among firms with fewer investments. The effects of changing characteristics and propensity to pay vary across dividend groups.The characteristics of dividend payers(large,profitable firms) do not change much after 1978,and controlling for characteristics,payers become only a bit more likely to stop paying.Changing characteristics and lower propensity to pay show up more clearly in the dividend decisions of former payers and firms that have never paid.For example,after 1978,lower profitability and abundant growth opportunities produce much lower expected rates of dividend initiation by firms that have never paid.But controlling for characteristics,firms that have never paid also initiate dividends at much lower rates after 1978,and former payers become much less likely to resume dividends
changes after 1978 is their pro"tability. Before 1978, new lists are more pro"table than seasoned "rms. In 1973}77, the earnings of new lists average a hefty 17.79% of book equity, versus 13.68% for all "rms. The pro"tability of new lists falls throughout the next 20 years. The earnings of new lists in 1993}98 average 2.07% of book equity, versus 11.26% for all "rms. The decline in the pro"tability of new lists is accompanied by a decline in the percent of new lists that pay dividends. During 1973}77, one-third of newly listed "rms pay dividends. In 1999, only 3.7% of new lists pay dividends. The surge in numbers and the changing nature of new lists produce a swelling group of small "rms with low pro"tability but large investments that have never paid dividends. This group of "rms is a big factor in the decline in the percent of "rms paying dividends. It is perhaps obvious that investors have become more willing to hold the shares of small, relatively unpro"table growth companies. But the resulting tilt of the publicly traded population toward such "rms is only half of the story for the declining incidence of dividend payers. Our more striking "nding is that "rms have become less likely to pay dividends, whatever their characteristics. We characterize the decline in the likelihood that a "rm pays dividends, given its characteristics, as a lower propensity to pay. What we mean is that the perceived bene"ts of dividends (whatever they are) have declined through time. We use two approaches to quantify how characteristics and propensity to pay combine to produce the decline in the percent of dividend payers. One approach works with logit regressions. The other uses relative frequencies of payers in portfolios formed on pro"tability, investment opportunities, and size. Both approaches say that lower propensity to pay is at least as important as changing characteristics in explaining the decline in the percent of dividend payers. Lower propensity to pay is quite general. For example, the percent of dividend payers among "rms with positive earnings declines after 1978. But the percent of payers among "rms with negative earnings also declines. Small "rms become much less likely to pay dividends after 1978, but there is also a lower incidence of dividend payers among large "rms. Firms with many investment opportunities become much less likely to pay dividends after 1978, but dividends also become less likely among "rms with fewer investments. The e!ects of changing characteristics and propensity to pay vary across dividend groups. The characteristics of dividend payers (large, pro"table "rms) do not change much after 1978, and controlling for characteristics, payers become only a bit more likely to stop paying. Changing characteristics and lower propensity to pay show up more clearly in the dividend decisions of former payers and "rms that have never paid. For example, after 1978, lower pro"tability and abundant growth opportunities produce much lower expected rates of dividend initiation by "rms that have never paid. But controlling for characteristics, "rms that have never paid also initiate dividends at much lower rates after 1978, and former payers become much less likely to resume dividends. E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43 5
6 E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 Share repurchases jump in the 1980s,and it is interesting to examine the role of repurchases in the declining incidence of dividend payers.We show that because repurchases are largely the province of dividend payers,they leave the decline in the percent of payers largely unexplained.Instead,the primary effect of repurchases is to increase the already high earnings payouts of cash dividend payers. Our story proceeds as follows.Section 2 presents the facts about dividends to be explained.Section 3 documents the characteristics of dividend payers and the progressive tilt of the population of publicly traded firms toward the character- istics of firms that have never paid.Section 4 presents qualitative evidence on the reduced propensity to pay dividends.Section 5 quantifies the effects of characteristics and propensity to pay.Section 6 examines share repurchases. Section 7 concludes. 2.Time trends in cash dividends Our goal is to explain the decline after 1978 in the incidence of dividend payers among NYSE,AMEX,and NASDAQ firms.We begin by examining the behavior of dividends for the longer 1926-99 period covered by CRSP. Fig.1 shows the total number of non-financial non-utility firms on CRSP each year,and the number of firms that (i)pay cash dividends,(ii)do not pay, (iii)formerly paid,and (iv)have never paid.Fig.2 shows percents of the total number of firms in the four dividend groups.We exclude utilities from the tests to avoid the criticism that their dividend decisions are a byproduct of regulation. We also exclude financial firms.The data to come on the characteristics of dividend payers are from Compustat,and Compustat's historical coverage of financial firms is spotty.Until mid-1962,CRSP covers only NYSE firms.The jumps in the total number of firms in 1963 and 1973 in Fig.1 are due to the addition of AMEX and then NASDAQ firms. The proportion of NYSE non-financial non-utility firms paying dividends falls by half during the early years of the Great Depression,from 66.9%in 1930 to 33.6%in 1933(Fig.2).Thereafter,the percent paying rises.In every year from 1943 to 1962,more than 82%of NYSE firms pay dividends.More than 90%pay dividends in 1951 and 1952.With the addition of AMEX firms in 1963,the proportion of payers drops to 69.3%.The addition of NASDAQ firms in 1973 lowers the proportion of payers to 52.8%,from 59.8%in 1972.It then rises to 66.5%in 1978,the peak for the post-1972 period of NYSE-AMEX-NASDAQ coverage.The proportion paying declines sharply after 1978,to 30.3%for 1987. It continues to decline thereafter,though less rapidly.In 1999,only 20.8%of firms pay dividends. Both the numerator(the number of dividend payers)and the denominator (the number of sample firms)contribute to the decline after 1978 in the percent
Share repurchases jump in the 1980s, and it is interesting to examine the role of repurchases in the declining incidence of dividend payers. We show that because repurchases are largely the province of dividend payers, they leave the decline in the percent of payers largely unexplained. Instead, the primary e!ect of repurchases is to increase the already high earnings payouts of cash dividend payers. Our story proceeds as follows. Section 2 presents the facts about dividends to be explained. Section 3 documents the characteristics of dividend payers and the progressive tilt of the population of publicly traded "rms toward the characteristics of "rms that have never paid. Section 4 presents qualitative evidence on the reduced propensity to pay dividends. Section 5 quanti"es the e!ects of characteristics and propensity to pay. Section 6 examines share repurchases. Section 7 concludes. 2. Time trends in cash dividends Our goal is to explain the decline after 1978 in the incidence of dividend payers among NYSE, AMEX, and NASDAQ "rms. We begin by examining the behavior of dividends for the longer 1926}99 period covered by CRSP. Fig. 1 shows the total number of non-"nancial non-utility "rms on CRSP each year, and the number of "rms that (i) pay cash dividends, (ii) do not pay, (iii) formerly paid, and (iv) have never paid. Fig. 2 shows percents of the total number of "rms in the four dividend groups. We exclude utilities from the tests to avoid the criticism that their dividend decisions are a byproduct of regulation. We also exclude "nancial "rms. The data to come on the characteristics of dividend payers are from Compustat, and Compustat's historical coverage of "nancial "rms is spotty. Until mid-1962, CRSP covers only NYSE "rms. The jumps in the total number of "rms in 1963 and 1973 in Fig. 1 are due to the addition of AMEX and then NASDAQ "rms. The proportion of NYSE non-"nancial non-utility "rms paying dividends falls by half during the early years of the Great Depression, from 66.9% in 1930 to 33.6% in 1933 (Fig. 2). Thereafter, the percent paying rises. In every year from 1943 to 1962, more than 82% of NYSE "rms pay dividends. More than 90% pay dividends in 1951 and 1952. With the addition of AMEX "rms in 1963, the proportion of payers drops to 69.3%. The addition of NASDAQ "rms in 1973 lowers the proportion of payers to 52.8%, from 59.8% in 1972. It then rises to 66.5% in 1978, the peak for the post-1972 period of NYSE-AMEX-NASDAQ coverage. The proportion paying declines sharply after 1978, to 30.3% for 1987. It continues to decline thereafter, though less rapidly. In 1999, only 20.8% of "rms pay dividends. Both the numerator (the number of dividend payers) and the denominator (the number of sample "rms) contribute to the decline after 1978 in the percent 6 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43
E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 7 6000 5000 4000 Non-Payers Never Paid 3000 2000 1000 Payers Did Pay 0 1926 1936 1946 1956 196 1976 1986 196 Year Fig.1.The number of CRSP firms in different dividend groups.The CRSP sample includes NYSE, AMEX,and NASDAQ securities with share codes of 10 or 11.A firm must have market equity data (price and shares outstanding)for December of year t to be in the sample for that year.We exclude utilities(SIC codes 4900-4949)and financial firms(SIC codes 6000-6999).Payers pay dividends in year t;non-payers do not.The two subgroups of non-payers are firms that have never paid and former payers(firms that do not pay in year t but did pay in a previous year). of firms paying dividends.Swelling numbers of new listings cause the CRSP sample to expand by about 40%,from 3,638 firms in 1978 to 5,113 in 1999 (Fig.1).New lists average 5.2%of listed firms(114 per year)during 1963-77, versus 9.6%(436 per year)for 1978-99(Table 1). More interesting,the population of dividend payers shrinks by more than 50%after 1978.There are 2,419 dividend payers in 1978 but only 1,182 in 1991 and 1,063 in 1999(Fig.1).The decline in the number of payers means that payers added to the sample fail to replace those lost.Dividend payers are lost when firms stop paying dividends or disappear from CRSP due to merger or delisting. Payers are added to the sample when former payers resume dividends,firms that have never paid initiate dividends,or new firms pay dividends in the year of listing. Table 2 provides details on the change in the number of payers.The rate at which dividend payers are lost from the sample(due to dividend terminations, mergers,and delistings)rises from 6.8%per year for 1963-77 to 9.8%for 1978-99.Much of the increase is due to mergers.There is no clear trend in the rate at which dividend payers terminate dividends.During 1978-99,on average 5.0%of payers stop paying each year.This is higher than the termination rate
Fig. 1. The number of CRSP "rms in di!erent dividend groups. The CRSP sample includes NYSE, AMEX, and NASDAQ securities with share codes of 10 or 11. A "rm must have market equity data (price and shares outstanding) for December of year t to be in the sample for that year. We exclude utilities (SIC codes 4900}4949) and "nancial "rms (SIC codes 6000}6999). Payers pay dividends in year t; non-payers do not. The two subgroups of non-payers are "rms that have never paid and former payers ("rms that do not pay in year t but did pay in a previous year). of "rms paying dividends. Swelling numbers of new listings cause the CRSP sample to expand by about 40%, from 3,638 "rms in 1978 to 5,113 in 1999 (Fig. 1). New lists average 5.2% of listed "rms (114 per year) during 1963}77, versus 9.6% (436 per year) for 1978}99 (Table 1). More interesting, the population of dividend payers shrinks by more than 50% after 1978. There are 2,419 dividend payers in 1978 but only 1,182 in 1991 and 1,063 in 1999 (Fig. 1). The decline in the number of payers means that payers added to the sample fail to replace those lost. Dividend payers are lost when "rms stop paying dividends or disappear from CRSP due to merger or delisting. Payers are added to the sample when former payers resume dividends, "rms that have never paid initiate dividends, or new "rms pay dividends in the year of listing. Table 2 provides details on the change in the number of payers. The rate at which dividend payers are lost from the sample (due to dividend terminations, mergers, and delistings) rises from 6.8% per year for 1963}77 to 9.8% for 1978}99. Much of the increase is due to mergers. There is no clear trend in the rate at which dividend payers terminate dividends. During 1978}99, on average 5.0% of payers stop paying each year. This is higher than the termination rate E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43 7
8 E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 100 80 Non-Payers Never Paid Payers Former Payers 0 1925 1936 1946 1956 1966 1978 1986 1996 Year Fig.2.The percent of CRSP firms in different dividend groups.The CRSP sample includes NYSE, AMEX,and NASDAQ securities with share codes of 10 or 11.A firm must have market equity data (price and shares outstanding)for December of year t to be in the sample for that year.We exclude utilities(SIC codes 4900-4949)and financial firms (SIC codes 6000-6999).Payers pay dividends in year t:non-payers do not.The two subgroups of non-payers are firms that have never paid and former payers(firms that do not pay in year t but did pay in a previous year). for 1963-77,3.5%per year,but it is lower than the rate for 1927-62,5.4%per year.A relatively steady termination rate is consistent with the evidence in DeAngelo and DeAngelo(1990)and DeAngelo et al.(1992)that only distressed firms(with strongly negative earnings)terminate dividends.In contrast,during 1978-99,dividend payers merge into other firms at the rate of 3.9%per year. This is higher than the merger rates for 1927-62(0.6%per year)and 1963-77 (2.7%per year).Dividend payers delist at the rate of 0.9%per year during 1978-99,versus0.3%for1927-62and0.8%for1963-77. Dividend payers disappear at a higher rate during 1978-98,but the more important factor in the decline in the number of payers is the failure of new payers to replace those that are lost.Former payers (always a relatively small group)resume dividends at an average rate of 11.8%per year during 1963-77; this rate falls to 6.2%per year for 1978-99 and 2.5%for 1999.New lists surge after 1978,but the proportion paying dividends in the year of listing declines from 50.8%for 1963-77 to 9.0%for 1978-99 and only 3.7%in 1999 (Table 1). New lists feed a swelling group of firms that never get around to paying dividends.The initiation rate for firms that have never paid dividends drops from 7.1%per year for 1963-77 to 1.8%for 1978-99 and a tiny 0.7%for 1999
Fig. 2. The percent of CRSP "rms in di!erent dividend groups. The CRSP sample includes NYSE, AMEX, and NASDAQ securities with share codes of 10 or 11. A "rm must have market equity data (price and shares outstanding) for December of year t to be in the sample for that year. We exclude utilities (SIC codes 4900}4949) and "nancial "rms (SIC codes 6000}6999). Payers pay dividends in year t; non-payers do not. The two subgroups of non-payers are "rms that have never paid and former payers ("rms that do not pay in year t but did pay in a previous year). for 1963}77, 3.5% per year, but it is lower than the rate for 1927}62, 5.4% per year. A relatively steady termination rate is consistent with the evidence in DeAngelo and DeAngelo (1990) and DeAngelo et al. (1992) that only distressed "rms (with strongly negative earnings) terminate dividends. In contrast, during 1978}99, dividend payers merge into other "rms at the rate of 3.9% per year. This is higher than the merger rates for 1927}62 (0.6% per year) and 1963}77 (2.7% per year). Dividend payers delist at the rate of 0.9% per year during 1978}99, versus 0.3% for 1927}62 and 0.8% for 1963}77. Dividend payers disappear at a higher rate during 1978}98, but the more important factor in the decline in the number of payers is the failure of new payers to replace those that are lost. Former payers (always a relatively small group) resume dividends at an average rate of 11.8% per year during 1963}77; this rate falls to 6.2% per year for 1978}99 and 2.5% for 1999. New lists surge after 1978, but the proportion paying dividends in the year of listing declines from 50.8% for 1963}77 to 9.0% for 1978}99 and only 3.7% in 1999 (Table 1). New lists feed a swelling group of "rms that never get around to paying dividends. The initiation rate for "rms that have never paid dividends drops from 7.1% per year for 1963}77 to 1.8% for 1978}99 and a tiny 0.7% for 1999. 8 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43
E.F. Fama. French Journal of Financial Economics 60 (2001)3-43 9 科 6661 9 g 今 8s 86-166 IIS 86-4661 sec P55 8 紧 86-4661 然 系 -6-8861 青 是 云 P 610 蓝 目 66696366126-99669036129-30560-71622-196169896166316101956629529-926 26-886 SIS 76-336-78-86 1080 73-186 629 百 三 器 18-0861 006 000 季 28-36 2382 28-8561 c8S 81g 8'IE 3 雪 78-8.61 209 兵 0 75-266 678.2 20 多 冷 060 0091 00 20796100-096 99 三 21女 20-8961 999 后 501 27-79579-32676-92577-19586896 女20L 6 600 125 455 浴 声 G 4 2050 20W 云 登 景 天 86-956 月 女 66-8/670-59666-596m S13 云丹 805 511796 51E 府 常 616℃ S02 贡 E 86-7960 Z'IS 8.34 厨 5 29-226m 165 0.00 EsI 片 0E8 SISII MON suuy isndwo jo suno SIS1I MON
Table 1 Counts and percents of CRSP and Compustat "rms in di !erent dividend groups Payers pay dividends in year t; non-payers do not. The two subgroups of non-payers are "rms that have never paid and former payers ("rms that do not pay in year t but did pay in a previous year). A new list is a "rm that "rst appears on CRSP or Compustat in year t. (See the appendix for more complete de"nitions of payers, non-payers, and new lists.) New Lists that Pay is the percent of newly listed "rms that pay in year t. The numbers are averages of annual values for the indicated time periods. Counts of CRSP "rms 1926}62 1963}99 1963}77 1978}99 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 1999 All "rms 762 3,679 2,528 4,464 1,779 1,948 3,856 3,735 4,357 4,276 5,208 5,113 New lists 25 305 114 436 99 140 103 286 515 352 584 322 Counts of Compustat "rms 1963}98 1963}77 1978}98 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 All "rms 2,919 1,823 3,702 1,024 1,600 2,847 2,883 3,301 3,566 4,831 New lists 205 69 302 61 100 45 112 283 261 511 Percents of CRSP "rms 1926}62 1963}99 1963}77 1978}99 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 1999 Payers 74.7 47.6 65.5 35.5 71.6 64.6 60.3 58.2 36.1 29.4 23.5 20.8 Non-payers 25.3 52.4 34.5 64.5 28.4 35.4 39.7 41.8 63.9 70.6 76.5 79.2 Never paid 10.0 42.2 25.4 53.7 20.9 23.7 31.6 31.8 51.7 58.7 66.6 70.1 Former payers 15.3 10.1 9.1 10.8 7.4 11.7 8.2 10.0 12.1 11.9 9.8 9.1 New lists 3.5 7.8 5.2 9.6 5.6 7.2 2.7 7.5 11.7 8.2 11.2 6.3 New lists that pay 83.0 25.9 50.8 9.0 72.1 47.3 33.1 15.7 8.8 7.9 5.2 3.7 Percents of Compustat "rms 1963}98 1963}77 1978}98 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 Payers 51.2 68.5 38.8 74.5 66.6 64.3 62.7 40.0 31.9 23.6 Non-payers 48.8 31.5 61.2 25.5 33.4 35.7 37.3 60.0 68.1 76.4 Never paid 39.7 23.1 51.7 19.4 23.0 26.8 28.6 49.7 58.1 67.1 Former payers 9.1 8.5 9.6 6.1 10.5 8.9 8.7 10.2 10.0 9.3 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43 9
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Table 2 What happens in year t to CRSP "rms that do and do not pay dividends in year t!1 Firms that Continue to Pay pay dividends in years t!1 and t. Firms that Stop Paying pay dividends in t!1 and not in t. Firms that Merge are delisted in year t with a CRSP delist code between 200 and 299. Delist includes all other "rms delisted in year t. The numbers are averages of annual values for the indicated time periods. What happens in year t to "rms that pay dividends in year t!1 (percent) 1927}62 1963}99 1963}77 1978}99 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 1999 Continue to pay 93.7 91.3 93.1 90.1 94.1 91.3 94.0 90.8 88.1 89.4 91.9 89.6 Stop paying 5.4 4.4 3.5 5.0 2.6 4.5 3.3 4.1 5.7 6.0 4.5 4.2 Merge 0.6 3.4 2.7 3.9 2.6 3.5 1.9 3.9 4.4 3.8 3.2 5.5 Delist 0.3 0.8 0.6 0.9 0.8 0.5 0.5 1.1 1.7 0.8 0.4 0.5 What happens in year t to "rms that do not pay dividends in year t!1 (percent) 1927}62 1963}99 1963}77 1978}99 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 1999 Start paying 15.0 5.2 8.8 2.7 9.9 4.1 12.3 5.0 2.5 2.4 1.5 0.9 Do not pay 81.2 86.0 84.9 86.8 84.3 90.3 80.0 86.4 86.3 85.5 89.3 82.3 Merge 0.8 3.2 2.3 3.8 2.1 2.5 2.3 3.7 2.8 3.5 4.2 7.3 Delist 2.9 5.1 3.5 6.3 3.6 2.5 4.3 4.1 7.7 8.1 4.9 9.3 Percent of non-payers in year t!1 that start paying in year t 1927}62 1963}99 1963}77 1978}99 1963}67 1968}72 1973}77 1978}82 1983}87 1988}92 1993}98 1999 All non-payers in t!1 15.0 5.2 8.8 2.7 9.9 4.1 12.3 5.0 2.5 2.4 1.5 0.9 Never paid in t!1 8.5 4.0 7.1 1.8 6.9 3.2 11.3 3.6 1.4 1.7 1.0 0.7 Former payers in t!1 16.9 8.5 11.8 6.2 14.1 6.2 15.1 9.4 6.5 5.8 4.3 2.5 10 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43
E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 11 Although mergers contribute to the decline in the number of dividend payers, they are not important in the decline in the percent of payers.During the critical 1978-99 period,non-payers merge into other firms at about the same rate(3.8% per year)as payers(3.9%per year),so mergers have little effect on the percent of firms paying dividends.Non-payers delist at a higher rate(6.3%per year for 1978-99)than payers (0.9%per year).Thus,delistings reduce the number of firms paying dividends,but they actually increase the percent of firms paying. Fig.2 gives a simple view of the factors that contribute to the decline in the percent of firms paying dividends.Terminations by dividend payers and re- sumptions by former payers have little net effect.Terminations and resumptions determine the population of former payers,which grows from 319 firms in 1978 to 466 in 1999 (Fig.1).Because the number of listed firms also grows,the proportion of all firms accounted for by former payers only rises from 8.8%in 1978 to 9.1%in 1999 (Fig.2).As a result,the decline in the proportion of firms paying dividends (from 66.5%in 1978 to 20.8%in 1999)almost matches the growth in the proportion that have never paid (from 24.7%in 1978 to 70.1%in 1999).This group (new lists that never become dividend payers)is a big factor in both the decline in the numerator of the percent of dividend payers(the number of payers)and the increase in the denominator(the number of sample firms). The rest of the paper addresses two questions raised by the declining inci- dence of dividend payers:(i)Has the population of firms drifted toward a lower frequency of firms with the characteristics typical of payers,or(ii)have firms with the characteristics typical of payers become less likely to pay dividends?We start by establishing the characteristics of dividend payers,and the declining incidence of these characteristics among publicly traded firms. 3.Characteristics of dividend payers Our evidence on the characteristics of dividend payers and non-payers is from Compustat.The time period,1963-98,is shorter than the 1926-99 CRSP period examined above,but the Compustat data cover the post-1972 NYSE-AMEX- NASDAQ period and the post-1978 period of most interest to us. On average,the CRSP sample has about 750 more firms than the Compustat sample in their shared 1963-98 period (Table 1).The difference between the samples is due to CRSP's more complete coverage and the data requirements we impose on the Compustat sample(see the appendix).But the Compustat sample does show the sharp decline in the percent of dividend payers observed in the CRSP sample.Dividend payers average 64.3%of Compustat firms in 1973-77 and 23.6%in 1993-98(Table 1).The averages for CRSP are 60.3%in 1973-77 and23.5%in1993-98. Our initial discussion of the characteristics of dividend payers focuses on the evidence from summary statistics that payers and non-payers differ in terms of
Although mergers contribute to the decline in the number of dividend payers, they are not important in the decline in the percent of payers. During the critical 1978}99 period, non-payers merge into other "rms at about the same rate (3.8% per year) as payers (3.9% per year), so mergers have little e!ect on the percent of "rms paying dividends. Non-payers delist at a higher rate (6.3% per year for 1978}99) than payers (0.9% per year). Thus, delistings reduce the number of "rms paying dividends, but they actually increase the percent of "rms paying. Fig. 2 gives a simple view of the factors that contribute to the decline in the percent of "rms paying dividends. Terminations by dividend payers and resumptions by former payers have little net e!ect. Terminations and resumptions determine the population of former payers, which grows from 319 "rms in 1978 to 466 in 1999 (Fig. 1). Because the number of listed "rms also grows, the proportion of all "rms accounted for by former payers only rises from 8.8% in 1978 to 9.1% in 1999 (Fig. 2). As a result, the decline in the proportion of "rms paying dividends (from 66.5% in 1978 to 20.8% in 1999) almost matches the growth in the proportion that have never paid (from 24.7% in 1978 to 70.1% in 1999). This group (new lists that never become dividend payers) is a big factor in both the decline in the numerator of the percent of dividend payers (the number of payers) and the increase in the denominator (the number of sample "rms). The rest of the paper addresses two questions raised by the declining incidence of dividend payers: (i) Has the population of "rms drifted toward a lower frequency of "rms with the characteristics typical of payers, or (ii) have "rms with the characteristics typical of payers become less likely to pay dividends? We start by establishing the characteristics of dividend payers, and the declining incidence of these characteristics among publicly traded "rms. 3. Characteristics of dividend payers Our evidence on the characteristics of dividend payers and non-payers is from Compustat. The time period, 1963}98, is shorter than the 1926}99 CRSP period examined above, but the Compustat data cover the post-1972 NYSE-AMEXNASDAQ period and the post-1978 period of most interest to us. On average, the CRSP sample has about 750 more "rms than the Compustat sample in their shared 1963}98 period (Table 1). The di!erence between the samples is due to CRSP's more complete coverage and the data requirements we impose on the Compustat sample (see the appendix). But the Compustat sample does show the sharp decline in the percent of dividend payers observed in the CRSP sample. Dividend payers average 64.3% of Compustat "rms in 1973}77 and 23.6% in 1993}98 (Table 1). The averages for CRSP are 60.3% in 1973}77 and 23.5% in 1993}98. Our initial discussion of the characteristics of dividend payers focuses on the evidence from summary statistics that payers and non-payers di!er in terms of E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43 11
12 E.F.Fama,K.R.French Journal of Financial Economics 60 (2001)3-43 profitability,investment opportunities,and size.The evidence from the sum- mary statistics is then confirmed with logit regressions. 3.1.Profitability Table 3 details the characteristics of firms in various dividend groups.Divi- dend payers have higher measured profitability than non-payers.For the full 1963-98 period,E/A,(the ratio of aggregate earnings before interest to aggreg- ate assets)averages 7.82%per year for payers versus 5.37%for non-payers. Among non-payers,E/A,averages 4.54%per year for former dividend payers. This is lower than the profitability of firms that have never paid dividends, 6.11%per year,which in turn is below the profitability of dividend payers, 7.82%per year. Earnings before interest,E,are the payoff on a firm's assets,but earnings available for common,Y.,may be more relevant for the decision to pay dividends.Table 3 shows that the gap between the profitability of payers and non-payers is wider when profitability is measured as Y,/BE,(aggregate com- mon stock earnings over aggregate book equity).For 1963-98,Y,/BE,averages 12.75%for dividend payers,versus 6.15%for non-payers.Among non-payers, Y,/BE,averages 7.94%for firms that have never paid dividends and only 3.18% for former payers. Low profitability becomes more common in the second half of the 1963-98 period.The plots of the decile breakpoints for E/A,in Fig.3 provide perspect- ive.Initially the breakpoints drift upward,peaking around 1979 or 1980.After the peak years,profitability declines.The decline is marginal in the higher profitability deciles,but it is large in the lower profitability deciles.The lowest breakpoint(the tenth percentile)switches from consistently positive to consis- tently negative in 1982.At least 20%of firms have negative earnings before interest after 1984.In the last three years,1996-98,negative earnings before interest afflict more than 30%of the firms. Many of the firms that are unprofitable later in the sample period are new listings.Until 1978,more than 90%of new lists are profitable (Fig.4).There- after,the fraction with positive earnings falls.In 1998,only 51.5%of new lists have positive common stock earnings.Table 3 shows that before 1982,new lists even new lists that do not pay dividends-tend to be more profitable than all publicly traded firms.After 1982 the profitability of new lists falls.The deteriora- tion occurs as the number of new lists explodes,and it is dramatic for the increasingly large group of new lists that do not pay dividends.By 1993-98 (when there are 511 Compustat new lists per year and only 5.2%pay dividends), the common stock earnings of newly listed non-payers average only 0.27%of book equity,versus 11.26%for all firms.The low profitability of new lists later in the sample period is in line with similar evidence on the low post-issue profitability of IPO firms (Jain and Kini,1994;Mikkelson et al.,1997)
pro"tability, investment opportunities, and size. The evidence from the summary statistics is then con"rmed with logit regressions. 3.1. Proxtability Table 3 details the characteristics of "rms in various dividend groups. Dividend payers have higher measured pro"tability than non-payers. For the full 1963}98 period, E /A (the ratio of aggregate earnings before interest to aggregate assets) averages 7.82% per year for payers versus 5.37% for non-payers. Among non-payers, E /A averages 4.54% per year for former dividend payers. This is lower than the pro"tability of "rms that have never paid dividends, 6.11% per year, which in turn is below the pro"tability of dividend payers, 7.82% per year. Earnings before interest, E , are the payo! on a "rm's assets, but earnings available for common, > , may be more relevant for the decision to pay dividends. Table 3 shows that the gap between the pro"tability of payers and non-payers is wider when pro"tability is measured as > /BE (aggregate common stock earnings over aggregate book equity). For 1963}98, > /BE averages 12.75% for dividend payers, versus 6.15% for non-payers. Among non-payers, > /BE averages 7.94% for "rms that have never paid dividends and only 3.18% for former payers. Low pro"tability becomes more common in the second half of the 1963}98 period. The plots of the decile breakpoints for E /A in Fig. 3 provide perspective. Initially the breakpoints drift upward, peaking around 1979 or 1980. After the peak years, pro"tability declines. The decline is marginal in the higher pro"tability deciles, but it is large in the lower pro"tability deciles. The lowest breakpoint (the tenth percentile) switches from consistently positive to consistently negative in 1982. At least 20% of "rms have negative earnings before interest after 1984. In the last three years, 1996}98, negative earnings before interest a%ict more than 30% of the "rms. Many of the "rms that are unpro"table later in the sample period are new listings. Until 1978, more than 90% of new lists are pro"table (Fig. 4). Thereafter, the fraction with positive earnings falls. In 1998, only 51.5% of new lists have positive common stock earnings. Table 3 shows that before 1982, new lists } even new lists that do not pay dividends } tend to be more pro"table than all publicly traded "rms. After 1982 the pro"tability of new lists falls. The deterioration occurs as the number of new lists explodes, and it is dramatic for the increasingly large group of new lists that do not pay dividends. By 1993}98 (when there are 511 Compustat new lists per year and only 5.2% pay dividends), the common stock earnings of newly listed non-payers average only 0.27% of book equity, versus 11.26% for all "rms. The low pro"tability of new lists later in the sample period is in line with similar evidence on the low post-issue pro"tability of IPO "rms (Jain and Kini, 1994; Mikkelson et al., 1997). 12 E.F. Fama, K.R. French / Journal of Financial Economics 60 (2001) 3}43
