Finding the Disappearing Dividends: Stock Repurchaser Characteristics and Their Increasing Propensity to Pay

Abstract

The total propensity to repay capital has risen not fallen as suggested by Fama and French 2001. What has fallen is the time series regularity, in respect to annual capital repayment as firms have shifted from dividend payments to stock repurchases. To understand capital repayment policy I focus my attention on the repayment participation decision of the marginal firm by classifying firms into discrete payment-types and weighting by firms not dollars. Weighting by dollars or using a continuous payment-type variable only answers the question: why do the largest most successful firms pay dividends? That is an interesting question but not the only one. I show that the first firms to employ stock repurchases in the 1980s look like an average of firms that did not repay capital and firms that paid dividends. Over time stock repurchasers have encroached on the territory of dividend payers, supporting the substitution hypothesis and explaining the disappearing dividends of Fama and French 2001. Stock repurchasers have also encroached on the territory of non-payers, helping to increase overall capital repayment rates at the bottom of the firm distribution. After showing the spread of stock repurchases, I document the time series behavior of stock repurchases shows regular patterns despite not occurring annually as dividend payments do. The lower frequency of stock repurchases causes the standard cross-sectional classification of firms that worked well when dividend payments dominated, to undercount stock repurchasers by as much as 50%. To correct this bias I propose an alternative measure: classify firms by their lifetime payment behavior rather than annual payment behavior.