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RFS Advance Access originally published online on August 21, 2008
Review of Financial Studies 2009 22(1):79-116; doi:10.1093/rfs/hhn073
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Disappearing Dividends, Catering, and Risk

Gerard Hoberg
Robert H. Smith School of Business, University of Maryland

Nagpurnanand R. Prabhala
Robert H. Smith School of Business, University of Maryland

Send correspondence to Gerard Hoberg, Robert H. Smith School of Business, University of Maryland, College Park, MD 20742-1815. E-mail: ghoberg{at}rhsmith.umd.edu.

JEL Classification: G15, G30, G38


  Abstract

Fama and French (2001a) show that the propensity to pay dividends declines significantly between 1978 and 1999. We examine this "disappearing dividends" puzzle through the lens of risk and report two main findings: (i) Risk is a significant determinant of the propensity to pay dividends, and it explains roughly 40% of disappearing dividends; (ii) We find little support for the view that disappearing dividends reflects firms' catering to transient fads for dividends. Absent risk controls, proxies for fads matter, but these proxies are insignificant once we control for risk. Our results are robust to an extensive battery of robustness tests that vary samples, time periods, proxies for fads, the types of empirical tests, and the nature of payout decisions made by firms.

We are especially grateful to the editor and two anonymous referees for extensive and very helpful feedback. We thank Doron Avramov, Malcolm Baker, Gurdip Bakshi, Michael Brennan, Nemmara Chidambaran, Kose John, Alok Kumar, Vojislav Maksimovic, Roni Michaely, Darius Palia, Gordon Phillips, Manju Puri, and Ivo Welch, as well as seminar participants at American University, the spring 2006 NBER corporate finance conference, Rutgers University, Rice University, and the Utah Winter Finance Conference for comments on the paper.


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