A Growth Type Explanation for Persistence in Retained Earnings and Propensity to Pay Dividends
49 Pages Posted: 4 Aug 2010
Date Written: August 4, 2010
We show that while firms that typically pay dividends already have high ratios of retained-earnings-to-total-equity (RE/TE) and high propensities to pay (PTP) early on, firms that typically do not pay dividends have persistently low RE/TE and low PTP even after 20 years of growth. This non-ergodic phenomenon goes beyond a lifecycle explanation. We propose a growth type view, in which low growth type can accommodate the popular distribution-retention tradeoff argument in the lifecycle explanation for high RE/TE and PTP, but high growth type is responsible for persistently low RE/TE and PTP. The growth type view can explain why low RE/TE and PTP can be surprisingly long-lived, and suggests that typical non-payers deliberately do not pay dividends even when they can, because doing so may confuse the market.
Keywords: Dividends, Propensity to Pay, Retained Earnings, Growth Type, Persistence
JEL Classification: G32, G35
Suggested Citation: Suggested Citation