Reappearing Dividends

Abstract

During the last two decades of the 20th century, the propensity of U.S. firms to pay cash dividends declined significantly. Exacerbated by a sharp increase in stock repurchases, the trend away from dividends accelerated during the late 1990s leading some authors to conclude that dividend policy was shifting in a very fundamental way. This trend makes a sharp reversal starting in 2000. We investigate five possible reasons for why dividends are reappearing. Given the explosion in new firms during the 1990s, we find that a portion of this rebound is explained by the "maturity hypothesis." A simple model that relies only on maturity factors also forecasts a recent turn in dividend payout. Further, we also find that some firms may have chosen to use dividends as a signal of "confidence" in the wake of investor concerns over corporate governance. Finally, firms have responded to the Bush dividend tax cut as one might expect, yet this story is not complete as the rebound in the dividends starts well before tax reform occurred. We do not find much support for the idea that the recent rebound is due simply to managers catering to the whims of investors, nor to a decrease in the availability of good investment projects. One hesitates to read too much into this rebound, yet our evidence is consistent with the idea that corporate payout policy appears to be shifting back in favor of conventional cash dividends.

JEL Classification: G35