Abstract

We survey 384 financial executives and conduct in-depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956. American Economic Review 46, 97–113). However, 50 years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase earnings per share. Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele. In general, management views provide little support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play a secondary role.

Introduction
In 1956, John Lintner laid the foundation for the modern understanding of dividend policy. Lintner (1956) interviewed managers from 28 companies and argued that managers target a long-term payout ratio when determining dividend policy. He also concluded that dividends are sticky, tied to long-term sustainable earnings, paid by mature companies, and smoothed from year to year. In this paper, we survey and interview financial executives at the start of the 21st century to learn how dividend and repurchase policies are currently determined. We shed light on managers’ motives as well as on payout theories.

Using survey and field interviews, we are able to augment existing evidence on payout policy. We address issues such as the role of taxes, agency considerations, and signaling in the decision to pay; why young firms prefer not to pay dividends (Fama and French, 2001); why many firms prefer to pay out marginal cash flow through repurchases and not through dividends (Jagannathan et al., 2000; Grullon and Michaely, 2002); and at the same time why some companies still pay substantial dividends (Allen and Michaely, 2003; DeAngelo et al., 2004). A unique aspect of our survey is that we ask many identical questions about both dividends and repurchases, which allows us to compare and contrast the important factors that drive the selection of each form of payout. Overall, the surveys and field interviews provide a benchmark describing where academic research and real-world dividend policy are consistent and where they differ.

Our analysis indicates that maintaining the dividend level is a priority on par with investment decisions. Managers express a strong desire to avoid dividend cuts, except in extraordinary circumstances. However, beyond maintaining the level of dividends per share, payout policy is a second-order concern; that is, increases in dividends are considered only after investment and liquidity needs are met. In contrast to Lintner's era, we find that the target payout ratio is no longer the preeminent decision variable affecting payout decisions. In terms of when nonpayers might initiate dividend payments, two reasons dominate: a sustainable increase in earnings, and demand by institutional investors.

Repurchases were virtually nonexistent when Lintner (1956) and Miller and Modigliani (1961) wrote their papers, so it is not surprising that these authors ignore repurchases. Because of their growing importance over the last two decades, we study repurchases in depth and identify key factors that influence repurchase policy. Consistent with a Miller and Modigliani irrelevance theorem, and in contrast to decisions about preserving the level of the dividend, managers make repurchase decisions after investment decisions. Many executives view share repurchases as being more flexible than dividends, and they use this flexibility in an attempt to time the market by accelerating repurchases when they believe their stock price is low. Chief Financial Officers (CFOs) are also very conscious of how repurchases affect earnings per share, consistent with Bens et al. (2003). Companies are likely to repurchase when good investments are hard to find, when their stock's float is adequate, and when they wish to offset option dilution.

Executives believe that dividend and repurchase decisions convey information to investors. However, this information conveyance does not appear to be consciously related to signaling in the academic sense. Managers reject the notion that they pay dividends as a costly signal to convey their firm's true worth or to purposefully separate their firm from competitors. Overall, we find little support for both the assumptions and resulting predictions of academic signaling theories that are designed to predict payout policy decisions, at least not in terms of conscious decisions that executives make about payout.

While some evidence exists that repurchases are used to reduce excess cash holdings (consistent with the Jensen (1986) free cash flow hypothesis), we do not find evidence that managers use payout policy to attract a particular investor clientele that could monitor their actions (as in Allen et al., 2000). Executives believe that dividends are attractive to individual investors but that dividends and repurchases are equally attractive to institutions. In general, most executives say that they do not use payout policy as a tool in an attempt to alter the proportion of institutions among their investors.

Executives indicate that taxes are a second-order payout policy concern. Most say that tax considerations are not a dominant factor in their decision about whether to pay dividends or to increase dividends, or in their choice between payout in the form of repurchases or dividends. A follow-up survey conducted in June 2003, after dividend taxes had been reduced via legislation, reinforces the second-order importance of taxation. While a minority of executives in that survey say that reduced dividend taxation would lead to dividend increases at their firms, more than two-thirds say that the dividend tax reduction would definitely not or probably not affect their dividend decisions. For initiations, only 13% of nonpayers say that the tax cut will lead to their firm initiating dividends.

Our finding that taxes are “second-order” important is consistent with research investigating the recent dividend tax cut. We find that taxes are not first-order important for most firms but they are important at the margin for some firms (e.g., 13% of nonpayers). Chetty and Saez (2004) present numbers consistent with our survey evidence: As of early 2004 about six percent of nonpayers had initiated dividends since the 2003 dividend tax cut. Julio and Ikenberry (2004) argue that the recent increase in dividend payments can not be entirely explained by reduced taxation because (1) the recent increase in dividends by firms that already paid dividends began before the tax rate decrease, and (2) many recent dividend initiations have occurred in stocks held predominantly by institutions, where tax motivations are less obvious. All in all, taxes matter but in a second-order manner.

The rest of the paper proceeds as follows. Section 2 describes the sample and presents summary statistics. Section 3 investigates the interaction of dividend, share repurchase, and investment decisions. Section 4 compares the practice of payout policy at the beginning of the 21st century with one-half century earlier when Lintner (1956) conducted his classic analysis. In addition to survey evidence, Section 4 uses regressions to estimate speed of adjustment and target payout parameters and concludes that the importance of the payout ratio target has declined in recent decades. Section 5 analyzes how modern executives’ views about payout policy match up with various theories that have been proposed to predict dividend and repurchase decisions. Section 6 discusses the factors that CFOs and treasurers of nonpayout firms say might eventually encourage their firms to initiate dividends or repurchases. Section 7 concludes and summarizes the rules of the game that affect the corporate decision-making process.

Section snippets
Sample and summary statistics
The survey sample contains responses from 384 financial executives. All total, the survey covers 256 public companies (of which 166 pay dividends, 167 repurchase their shares, and 77 do not currently pay out) and 128 private firms. Most of our analysis is based on the public firms, though we separately analyze private firms in Section 5.5. This moderately large sample and broad cross section of firms allows us to perform standard statistical tests. In addition to the survey, we separately

The hierarchy of dividends, repurchases, and investment decisions
Modigliani and Miller (1958) argue that firm value is driven by operating and investment decisions, not financing or payout decisions. We ask several questions to determine the relative importance assigned by executives to payout policy. The survey evidence indicates that dividend choices are made simultaneously with (or perhaps a bit sooner than) investment decisions but that repurchase decisions are made later. On a scale from –2 (strongly disagree) to +2 (strongly agree), the average rating

Benchmarking to Lintner (1956)
Lintner (1956) offers two key results. First, corporate dividend decisions were made conservatively. Second, the starting point for most payout decisions was the payout ratio (i.e., dividends as a proportion of earnings). Combining these two key features, Lintner's empirical model of dividend policy is simple: Dividends per share equal a coefficient times the difference between the target dividend payout and lagged dividends per share. The coefficient is less than one because it reflects a

Factors affecting payout policy
Miller and Modigliani (1961) show that corporate value is unrelated to payout policy in perfect and frictionless capital markets. Numerous theories show how payout policy can affect firm value if one of the Miller and Modigliani assumptions is relaxed. In this section, we present our findings within the context of these theories, to determine which are most consistent with our survey findings. When appropriate, we highlight differing implications for dividends versus repurchases.

When and why will nonpayers initiate payout?
Fama and French (2001) note that the proportion of firms paying dividends fell dramatically from the late 1970s through the rest of the twentieth century. Julio and Ikenberry (2004) and Chetty and Saez (2004) show that the proportion of payers bottomed out at around 17% in 2000 and rebounded to about 25% in early 2004. Therefore, it is important to understand what leads firms to initiate payout.

Table 9 summarizes the initiation plans of firms that do not pay out. Row 1 indicates more than

Summary and discussion
By asking managers about their opinions and the motives underlying their firms’ payout policies, this paper provides a unique perspective on corporate dividend and repurchase policies at the beginning of the 21st century. The evidence gathered through surveying and interviewing a large number of CFOs contributes to an understanding of payout policy along three dimensions. First, in line with Lintner (1956), we show stylized facts concerning dividend policy. In addition, we gather parallel