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The Evolving Relation between Earnings, Dividends, and Stock Repurchases

Douglas J. Skinner

The University of Chicago - Booth School of Business

May 2006

There have been fundamental changes in corporate dividend policy over the last several decades (Fama and French, 2001; DeAngelo, DeAngelo, and Skinner, 2000). To shed new light on the disappearance of dividends, this paper examines how the relation between earnings and corporate payout policy changes over the last 50 years. Since 1980, two groups of payers emerge: firms that both pay dividends and make repurchases and firms that only make repurchases. For firms that both pay dividends and make repurchases, managers increasingly coordinate dividend and repurchase decisions in a way that maps total payouts into earnings. Because managers use repurchases to pay out earnings increases, this helps to explain why dividend policy becomes increasingly conservative. The large majority of these firms have paid dividends for decades. Earnings do a good job of explaining payouts for firms that only make repurchases as well, suggesting that newer firms without a dividends history use repurchases in place of dividends. Overall, the evidence suggests that corporate earnings now drive total firm payouts - dividends and repurchases - and that repurchases play an increasingly important role, which helps to explain the disappearance of dividends.

Number of Pages in PDF File: 60

Keywords: Payout Policy, Dividends, Stock Repurchases, Earnings

JEL Classification: G35, M41

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Date posted: June 8, 2006  

Suggested Citation

Skinner, Douglas J., The Evolving Relation between Earnings, Dividends, and Stock Repurchases (May 2006). Available at SSRN: http://ssrn.com/abstract=906853 or http://dx.doi.org/10.2139/ssrn.906853

Contact Information

Douglas J. Skinner (Contact Author)
The University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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