Propensity to Pay Dividends A Test of The Life Cycle Theory

Sammanfattning: A firm can distribute cash to its shareholders through dividends and share repurchases. Within the area of dividend policy, there is a plethora of previous research studying factors driving a firm to distribute, or not to distribute, cash to its owners. Using Swedish and US yearly panel data from January 1st 1997 to December 31st 2011 and performing LPM-regressions, we find firm maturity, approximated by retained earnings to total common equity, to have a significant positive impact on a firm's propensity to pay dividends. The results are robust, also when controlling for profitability, size, investment opportunities, solidity, cash holdings and dividend history. Our findings are consistent with the Life Cycle Theory developed by Fama and French in 2001. One unique finding of our study is the strong indication of a higher general propensity to pay dividends in Sweden, compared to the US. Part of this difference appears to be explained by the relative tax disadvantage for dividends to capital gains in the US prior to 2003. Also, use of share repurchases is more frequent in the US. As earlier research (e.g. Grullon and Michaely 2002) find evidence supporting a substitution effect between the two ways of distributing cash, this finding provides a second explanation to the general difference. One conclusion is that investors prioritizing dividends should favor Swedish firms over US firms as, assuming identical firm characteristics, the probability that a firm will pay dividends in a given years is higher for a Swedish firm.