Financial Strategy, Second Edition

7

Disappearing Dividends

Changing Firm Characteristics or Lower Propensity to Pay?

Eugene F. Fama and Kenneth R. French

The proportion of U.S. firms paying dividends drops sharply during the 1980s and 1990s. In 1973, the first year of complete data coverage on NYSE, AMEX, and NASDAQ firms, 52.8% of publicly traded firms (excluding utilities and financials) pay dividends. This proportion rises to 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?

Three characteristics tend to affect the likelihood that a firm pays dividends: profitability, growth, and size. Larger firms and more profitable firms are more likely to pay dividends, and high-growth firms are less likely to do so. The decline after 1978 in the percent of firms paying dividends is due in part to an increasing number of small, publicly traded firms with low reported earnings and high growth. This tilt in the population of firms is driven by an explosion of newly listed firms, as well as by the changing nature of the new firms. Newly listed firms always tend to be small, with high asset growth rates and high market-to-book ...