The Relation Between Payouts and Profits Over the Last Four Decades

Abstract

This paper examines the changing relation between corporate payouts and profits over the last four decades. Relying on the clean surplus relation, we develop a piecewise regression model permitting a differential response between positive earnings (i.e. profits) and negative earnings (i.e. losses) to payouts. To motivate this asymmetry, we show that aggregate payouts of profits firms are about 17 times higher than aggregate payouts of loss firms. We provide evidence that the relation between payouts (and their component dividends and repurchases) and profits has significantly changed over the past decades. The observed upward trend is driven by large profitable firms that have good investment opportunities. We discuss possible explanations for this observed trend.

Keywords: Dividends, Earnings, Payout policy, Stock repurchases

JEL Classification: G32, G35, M41