1. « Dividends have long been an enigma. »
Fama, French - Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60 (2001) 3-43
« Dividends have long been an enigma. »
Less valuable than capital gains?
Firm that pay dividends have a higher cost of equity?
The fact that many firms pay dividends is difficult to explain.
Outline of paper.
1. Introduction
2. Time trends in cash dividends
3. Characteristics of dividend payers
3.1 Profitability
3.2 Investment opportunities
3.3 Size
4. The propensity to pay dividends: qualitative evidence
5. Changing characteristics and propensity to pay: quantitative effects
5.1 Regression estimates
5.2 Regressions for different dividend groups
5.3 Estimates of base period probabilities from portfolios
5.4 Propensity to pay: entrails from the portfolio approach
6. Share repurchases
7. Conclusions
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Fama French Disappearing dividends

2. Time trends in cash dividends
See Table
Count of CRSP firm 3, ,113
Percent of CRSP firms
Payers
Non-payers
Never paid
Former payers
New lists
New lists that pay
Table 2 What happens in year t
to firm that pay dividends in year t-1: 89.6% continue to pay in 1999
to firm that pay no dividends in year t-1: 82.3% do not pay in 1999
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Fama French Disappearing dividends

3. Characteristics of dividends payers
Table Payers Non payers
Profitability
EBIT / Assets % %
Earnings / Book equity % %
Investment opportunities
Asset growth rate % %
Mkt to book % %
R&D/Assets % %
Size
• Asset ($m?) 3,
Results consistent with
– pecking-order model
firms reluctant to issue securities because of asymmetric information or transaction costs
– role of dividends in controlling the agency costs of free cash flow.
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Fama French Disappearing dividends

4. Changing characteristics or propensity to pay?
1. Estimate proba of paying dividend given characteristics for base period
2. Calculate expected dividend based on characteristics for subsequent period.
3. Take difference between expected % payers and actual % payers each year
• See Table Expected - Actual
Characteristics Mkt to Book Growth rate of asset
+ Growth rate of assets
% %
% %
% %
% %
% %
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Fama French Disappearing dividends

5. Fama French Disappearing dividends
Share repurchases
Surged in the mid -1980s.
Table
Share repurchases / Earnings 3.37% %
Substitue for dividends (tax purposes)? Mixed empirical results
Look at changes in treasury stock (! Share repurchases for mergers)
Higher proportion for Payers than for Non-payers
« the large share repruchases are mostly due to an increase in the desired payout ratios ofdividend payers »
26/07/2019
Fama French Disappearing dividends