A Growth Type Explanation for Persistence in Retained Earnings and Propensity to Pay Dividends

49 Pages Posted: 4 Aug 2010

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK)

Date Written: August 4, 2010

Abstract

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

Wu, Xueping and Au Yeung, Chau Kin, A Growth Type Explanation for Persistence in Retained Earnings and Propensity to Pay Dividends (August 4, 2010). Available at SSRN: https://ssrn.com/abstract=1653218 or http://dx.doi.org/10.2139/ssrn.1653218

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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