« 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 26/07/2019 Fama French Disappearing dividends

Time trends in cash dividends See Table 1 1973-1977 1999 Count of CRSP firm 3,856 5,113 Percent of CRSP firms Payers 60.3 20.8 Non-payers 39.7 79.2 Never paid 31.6 70.1 Former payers 8.2 9.1 New lists 2.7 6.3 New lists that pay 33.7 3.7 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 26/07/2019 Fama French Disappearing dividends

Characteristics of dividends payers Table 3 - 1993-98 Payers Non payers Profitability EBIT / Assets 6.88% 4.30% Earnings / Book equity 13.41% 4.12% Investment opportunities Asset growth rate 6.65% 17.67% Mkt to book 1.69% 1.86% R&D/Assets 2.09% 3.03% Size • Asset ($m?) 3,343.61 255.46 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. 26/07/2019 Fama French Disappearing dividends

Changing characteristics or propensity to pay? 1. Estimate proba of paying dividend given characteristics for base period 1963-1977 2. Calculate expected dividend based on characteristics for subsequent period. 3. Take difference between expected % payers and actual % payers each year • See Table 6 - Expected - Actual Characteristics Mkt to Book Growth rate of asset + Growth rate of assets 1980 2.9% 2.9% 1985 12.1% 16.3% 1990 22.4% 25.1% 1995 21.2% 29.2% 1998 23.3% 30.8% 26/07/2019 Fama French Disappearing dividends

Fama French Disappearing dividends Share repurchases Surged in the mid -1980s. Table 11 1973-77 1993-98 Share repurchases / Earnings 3.37% 35.46% 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