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Corporate payout policy in Australia and a test of thelife-cycle theory

Jeffrey J. Coultona, Caitlin Ruddockb*

aSchool of Accounting, Australian School of Business, The University of New South Walesbvan Eyk Research Limited, Sydney, NSW, Australia

Abstract

We provide evidence on the frequency and size of payouts by Australian firms,

and test whether the life-cycle theory explains Australian corporate payout poli-cies. Regular dividends remain the most popular mechanism for distributing cash

to shareholders, despite a slight decline in the proportion of dividend payers

since the relaxation of buyback regulations in 1998. Off-market share buybacks

return the largest amount of cash to shareholders. Dividend paying firms are lar-

ger, more profitable and have less growth options that nondividend paying firms.

Consistent with the life-cycle theory, we observe a highly significant relation

between the decision to pay regular dividends and the proportion of sharehold-

ers equity that is earned rather than contributed.

Key words: Dividends; Buybacks; Payout policy; Life-cycle theory

JEL classification: G35, G32

doi: 10.1111/j.1467-629X.2010.00356.x

* Caitlin Ruddock is employed as an Senior Investment Analyst at van Eyk ResearchLimited (ABN 99 010 664 632 AFSL 237917) (van Eyk). The views expressed in thisreport do not represent the views of van Eyk. To the maximum extent permitted by law,van Eyk expressly disclaims all liability in relation to the views expressed in this report.

This article was originally based on a chapter of Caitlin Ruddocks PhD dissertationundertaken at The University of New South Wales. She would like to thank her supervi-sors Stephen Taylor and Terry Walter for their valuable feedback. In addition, we thank

an anonymous reviewer, Wen He, Andrew Jackson and workshop participants at Mac-quarie University and Monash University, Queensland University, Queensland Universityof Technology and the University of Western Australia for their comments.

Received 11 September 2008; accepted 8 March 2010 by Robert Faff (Editor).

2010 The AuthorsAccounting and Finance 2010 AFAANZ

Accounting and Finance 51 (2011) 381407


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1. Introduction

In this article, we provide evidence on the frequency and magnitude of corpo-

rate payouts by Australian firms and examine determinants of payout policy. Inparticular, we test whether there is support for the theory that corporate payout

policy corresponds to different stages of firm life cycle (DeAngelo and DeAngelo,

2006; DeAngelo et al., 2006). Australia is a useful setting to investigate corporate

payout policy because its full dividend imputation system reduces tax disincen-

tives to pay dividends. The imputation system fully integrates the corporate and

individual tax regimes. Individuals pay tax on grossed-up dividend income at the

appropriate marginal tax rate but can claim a tax credit for the corporate tax

already paid on the dividend income. Dividend imputation therefore eliminates

double-taxation on dividends.

1

Given the importance of corporate payouts and the longstanding interest in

trying to understand the determinants of payout policy, a careful documentation

of Australian firms payout policies is timely. Despite many years of investiga-

tion, explaining payout policy remains challenging. There is little recently pub-

lished Australian research documenting the nature of and changes in corporate

payouts. Prior Australian research examines the value of imputation tax credits

and finds that one dollar of fully franked dividends is worth more than one dol-

lar, and also that the value of imputation tax credits (i.e., franking credits)

declined following tax law amendments designed to prevent trading in franking

credits (Wood, 1997; Walker and Partington, 1999; Cannavan et al., 2004). Gray

and Hall (2006) use the framework in Officer (1994) to derive a relationship

between the value of franking credits, the market risk premium and assumed

tax rate. Brown and Clarke (1993) assess the impact of changes in the impu-

tation system on the ex-dividend day pricing of Australian shares and show that

after the introduction of dividend imputation in 1987, shareholders obtained

80 per cent of the benefit of the imputed income tax credit.

The extent of and motivations for share buybacks as stated by Australian

firms in their ASX buyback announcements are described in Mitchell and Rob-

inson (1999), who find that the two prime motivations for Australian firms on-market buybacks over 19901995 are (i) signalling of future expectations and (ii)

an attempt to increase earnings per share or financial position (e.g., net tangible

assets per share). Mitchell and Dharmawan (2007) examine on-market buybacks

and find that signalling incentives are more important in determining the

1 Part 3.6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the rules cover-ing the imputation system today. A full imputation system removes the double taxationon dividends. Australia and New Zealand have a full imputation system. Japan, Canadaand the UK have a partial imputation system (i.e., there is a dividend tax credit for partof the underlying corporate tax rate). France, Germany and Italy have a partial exclusionsystem that allows part of the received dividends to be excluded from the taxable incomeat the shareholder level.

382 J. J. Coulton, C. Ruddock/Accounting and Finance 51 (2011) 381407



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explanations given for on-market buybacks than in comparable research using

United States data. Selective buybacks have often been used to remove specific

shareholders from the register. Brown and ODay (2007) find that share buyback

yields are positively associated with increases in dividend yields, which they inter-pret as consistent with Australian firms not altering dividend policy to generate

funds for buybacks.

For our sample, the number of firms paying regular and special dividends

increased over our sample period, while the proportion of sample firms paying

dividends has declined since the mid-1990s. However, sample selection issues

require caution in generalising these results for the entire Australian listed mar-

ket.2 The median and average cash distributions from regular and special divi-

dends increased over our sample period. The amount of regular dividends paid

out is still dominated by the largest listed companies. Australian firms onlybegan engaging in share buybacks with any regularity from 1995, despite legisla-

tion allowing companies to repurchase their shares being introduced in Australia

in 1989. The average amount of cash paid out annually per firm in off-market

buybacks quickly exceeded that from regular dividends, special dividends and

on-market buybacks. However, the lower number of Australian firms engaging

in buybacks (relative to those paying dividends) means that total dollar payout

from buybacks did not reach the total level of dividend payments, unlike the

position in the US (Skinner, 2008).

Prior empirical US evidence supports the life-cycle explanation for dividend

payments (Fama and French, 2001; Grullon et al., 2002; DeAngelo et al., 2006;

Denis and Osobov, 2008). In this article, we investigate whether the life-cycle the-

ory explains variation in Australian firms payouts and test whether Australias

dividend tax imputation system provides additional information about firm life

cycle.

Our evidence strongly indicates that the probability that a firm pays (regular

or special) dividends is increasing in the proportion of retained earnings in its

capital structure. The proportion of earned capital to total assets is a useful

proxy for firm life cycle (DeAngelo et al., 2006). Firms with a relatively low pro-

portion of retained earnings tend to be in growth or capital infusion stages,whereas firms with a high proportion of retained earnings tend to be more

mature and can generate cash but have fewer growth opportunities and are

therefore good candidates to pay dividends. We also find that the proportion of

retained earnings in a firms capital structure also explains the level of franking

credits attached to dividends. The probability of firms engaging in share buy-

backs is explained by firm life cycle; however, our life-cycle proxy is not as

strongly associated with the decision to undertake a buyback as it is for the deci-

sion to pay a dividend. In all of our tests of the life-cycle theory, we control for

firm size, profitability, growth and cash balances.

2 These issues are discussed in detail in section 3.

J. J. Coulton, C. Ruddock/Accounting and Finance 51 (2011) 381407 383



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Our results are robust to partitioning our sample on firm size; the coefficient

on our life-cycle proxy (retained earnings relative to total assets) is positive and

statistically significant for portfolios of both small and large firms.

The remainder of the article is arranged as follows. We review corporate pay-out policy research and the life-cycle theory in section two and outline our

research questions and design. Section three documents the frequency and size of

corporate payouts (i.e., dividends and share buybacks) in Australia and describes

data sources and sample selection. Results are discussed in section four, while

section five concludes.

2. Literature review and research design

2.1. What is the role of dividends?

One of the ongoing challenges for financial theory is to understand why firms

pay dividends and what influences the form of the cash distribution (Bagwell

and Shoven, 1989; Baker et al., 2002; Allen and Michaely, 2003; Brealy and

Myers, 2003). DeAngelo et al. (2008) provide a recent comprehensive analysis

and summary of corporate payout policy research that indicates the difficulty in

any one theory completely describing observed payout patterns and amounts.

Litner (1956) establishes the role of earnings in determining the dividend payout

ratio. He identifies the relation between current earnings and the existing dividend

rate to be the key driver of changes in dividend policy and suggests that managers

are reluctant to increase dividends unless future earnings can sustain the change.

As the assumptions required for Miller and Modiglianis (1961) dividend irrel-

evance theorem (e.g., frictionless capital markets) are not found in the real world,

there are typically three main explanations offered for why firms pay dividends:

(i) to convey private information about say, earnings (Bhattacharya, 1979; John

and Williams, 1985; Miller and Rock, 1985); (ii) to distribute free cash flow

(Jensen, 1986) or reduce agency costs (Easterbrook, 1984); and (iii) as a result of

tax clienteles (Miller and Modigliani, 1961). However, none of these explanations

fully explains corporate payout behaviour, and empirical tests of them providemixed results. Bernartzi et al. (1997) conclude that any relation between an unex-

pected change in dividends and a change in earnings is weak.

2.2. The life-cycle theory

The life-cycle theory has been advanced by Fama and French (2001), Grullon

et al. (2002) and DeAngelo et al. (2006). It suggests that the trade-off between

the advantages (e.g., flotation cost savings) and disadvantages (e.g., agency costs

of free cash flows) of the retention of earnings varies over the life of the firm.Firms in the early stage of profitability have greater investment opportunities

and less opportunity to internally generate cash. The optimal decision is to retain

cash to fund growth. As firms mature, they become more profitable and are able




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to internally generate cash in excess of their investment requirements. The

optimal policy will then be to retain sufficient earnings to invest in positive net

present value projects and distribute excess cash to shareholders. Payment of a

dividend is evidence of a firm reaching sustainable profitability.Fama and French (2001) find that US firms paying dividends are significantly

larger, more profitable and have fewer growth options than firms that do not

pay dividends. They argue that changes in firm characteristics do not fully

explain the decline in dividend payers over recent years.3 DeAngelo et al. (2006)

show that the proportion of a firms retained earnings to total assets is positively

associated with the probability of paying a dividend. This is consistent with the

firm relying more on earned rather than contributed equity, and more likely to

occur as firms mature and reach a steady state of profitability. They argue that

this is not consistent with the theory that dividends signal future profitability.Firms with low retained earnings would be ideal candidates for signalling, but it

is the large, currently profitable firms with less growth options that tend to pay

dividends. Similar results are found in Canada, UK, Japan, Germany and

France (Denis and Osobov, 2008).

Consistent with Fama and French (2001) and DeAngelo et al. (2006), we use

the Fama and MacBeth (1973) statistical methodology to test whether the likeli-

hood of a firm paying dividends depends systematically with a firms stage in its

financial life cycle, for which our proxy is the level of retained earnings as a pro-

portion of total assets (RETA). We estimate the following logit regression model

that takes the payment of dividends by firm i in year t as the dependent variable:

DIVi;t a0 b1RETAi;t b2TETAi;t b3SIZEi;t b4ROAi;t

b5ASSETGROWi;t b6CASH=TAi;t b7DIVi;t1:1

Our variable of interest is RETA, and the life-cycle theory predicts b1 to be

positive. We control for the proportion of total assets funded by total equity

(TETA), which can be thought of as a complement to leverage. Debt con-

tracts typically limit the extent of dividend payments, and TETA can be

thought of as capturing agency costs of debt.4 Firm size (SIZE) that we

proxy by using the natural logarithm of market capitalisation and profitability

(ROA, measured as operating income scaled by opening total assets) is

expected to be positively associated with dividend payments, and growth

3 DeAngelo et al. (2004) show the decline in dividend payers documented in Fama andFrench (2001) is concentrated among small firms that pay dividends. Large firms that paydividends have become more profitable and increased the size of the dividend payment.Despite the decline in numbers of dividend payers, aggregate dividends have increased.

However, Skinner (2008) documents that in the US, repurchases are increasingly beingused in place of dividends, even for firms that continue to pay dividends.

4 We obtain qualitatively similar results if we substitute TETA with a direct measure ofleverage (total liabilities divided by total equity).




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variables are expected to be negatively associated with dividend payments. We

use annual growth in total assets (ASSETGROW) as our proxy for firm

growth.5 In addition, we include a variable for the size of the cash holdings

relative to total assets (CASHTA). The expected sign of the relation betweenCASHTA and the likelihood of the payment of dividends is ambiguous

(DeAngelo et al., 2006). Firms establishing profitability are more likely to

retain cash to fund future investment, but firms with an excess of cash may

distribute that cash to reduce agency costs. Dividend policy is known to be

sticky (Litner, 1956), so we use an additional variable (DIVt)1) to control

for payment of a dividend in the prior year. We estimate separate logit regres-

sions for each of our sample years to obtain a time-series of fitted coefficients,

which are then used as inputs to t-statistics to gauge the statistical significance

of our explanatory variables.The same methodology is also employed to assess the probability of a firm

paying a special dividend. Special dividends in Australia are often used as a

means of distributing excess franking credits to shareholders (Pattenden and

Twite, 2008). Virtually, all firms that distribute special dividends distribute a reg-

ular dividend (93 per cent or 119 out of 128 firms). Firms that pay special divi-

dends are therefore likely to be more mature than nonspecial dividend paying

firms.

2.2. Franking credits

We next test whether firm life cycle is associated with variation in the level of

franking credits. When Australian companies pay tax in Australia they accrue

franking credits that can be attached to dividends declared and paid (ITAA 1997

s.200-5).6 Although franking credits are cumulative, tax laws are structured to

encourage firms to distribute franking credits.7 Management can attach these

credits to dividends declared up to a maximum franking credit rate (i.e., the com-

pany tax rate) (ITAA 1997 s.200-10).8 Dividends can be declared fully franked

(100 per cent tax credit); partially franked (0 per cent < tax credit < 100 per

cent) or unfranked (0 per cent tax credit). The higher the level of franking the

5 Our results are robust to using the start-of-year value of the ratio of the market value ofequity to book value of equity as a proxy for growth.

6 For tax purposes, a firm is an Australian resident if it is incorporated in Australia; or ifit is not incorporated in Australia, it must carry on a business in Australia and have eithercentral management or voting power in Australia (Australian Tax Office, 2004).

7 First, penalties for over-franking have always existed (i.e., franking deficit tax). Second,

franking credits have a present value to shareholders (Anderson et al., 2001). Attachingfranking credits to dividends typically reduces shareholders tax bills.

8 In Australia, directors set corporate payout policy (Corporations Act 2001 s.254U).However, for consistency with the literature, we refer to the directors as management.




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less tax a shareholder is required to pay on the associated dividend income. We

investigate whether the level of franking provides an additional measure of firm

life cycle.

Firms that pay dividends are not necessarily a homogenous group. Frankingcredits could convey additional information (to that conveyed by the payment

of a dividend per se) about Australian tax paid and profitability. Management

must determine the optimal dividend policy and consider the amount of frank-

ing credits available.9 Typically, firms paying unfranked dividends or partially

franked dividends have no remaining franking credits in their franking

account.10

As firms pay tax, they accrue franking credits. Typically, less than 100 per cent

of after-tax profits are distributed, so franking credits can accumulate over time.

This enables firms to pay fully franked dividends even if their current year tax-able earnings decline.11 Payment of fully franked dividends, particularly in years

when reporting a loss could indicate that a firm is mature with a strong history

of accounting and taxable earnings.12

Partially franked dividends indicate the effective tax rate on distributed

income is less than 30 per cent. It can also signal that the firm does not

have a lengthy history of accruing taxable income (i.e., that these firms have

few accumulated franking credits). Firms that are still growing and begin-

ning to report profits are likely to have taxable income that lags accounting

income. Despite generating cash that exceeds investment needs, they have a

lower effective tax rate and can only pay partially franked dividends.

Mature firms with declining profits may also pay partially franked divi-

dends. Despite reporting tax losses, these firms can distribute previously

accumulated franking credits. To test whether the level of franking is cap-

turing firm age, we rank firms by the level of franking on their dividends.

Of our sample firms that pay dividends, firms that pay unfranked dividends

are on average younger than other dividend paying firms. However, firms

9 In 2002, a benchmark rule was introduced, which requires that all frankable distribu-tions made during a period are franked to the same extent (ITAA 1997 s.200-10).

10 This assertion is based on inspecting a random selection of annual reports. The balanceof the franking credit account is disclosed in the annual reports but is not readily availableelectronically. Given the relatively large number of observations in the sample, this datawas not collected for this project. It would be interesting to collect this data in the future,but we believe it is not critical to the project as designed.

11 Note the effective tax rate is on distributed, not current, income. A firm can pay no tax

in year t but pay a fully franked dividend in year t due to a build up of franking credits inprior years.

12 As firms do not typically distribute 100 per cent of their after-tax earnings, it is possibleto have an effective tax rate of less than 30 per cent and still pay fully franked dividends.




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with the highest level of franking are younger than those ranked in the mid-

dle of the franking distribution.13

We test for the impact of franking by including in our estimation of equation

(1) an additional independent variable that captures the level of franking appliedto a firms prior year dividends. The level of franking (FRANKING) is calculated

by taking the weighted average level of franking credits.14 We do not use current

year franking level to explain current year dividend payments, as a firm that pays

a franked dividend has by definition paid a dividend that year. If franking credits

proxy for firms in different stages of the life cycle, we expect a positive associa-

tion on the extent of franking, again after controlling for firm size, profitability

and growth.

2.3. Share buybacks

Our final research question is whether other forms of corporate payment pol-

icy are related to firm life cycle. Brav et al. (2005) reports that US financial exec-

utives believe buybacks convey information to shareholders. Skinner (2008)

documents that share buybacks (repurchases) are increasingly replacing divi-

dends for US firms, including those firms that continue to pay dividends.15 How-

ever, Brown and ODay (2007) use Australian data and find that share

repurchase yields are positively related to dividend increases, which they suggest

indicates that Australian firms are not changing their dividend policy to provide

funds then used for buybacks.16 If buybacks do substitute for dividends and the

life-cycle theory applies to buybacks, then we would expect a positive association

between RETA and the probability of a firm undertaking an on-market buy-

back.17

13 We measure age as listing history (from the SPRR database).

14

For example, if the first dividend during the year was 100 per cent franked and paid on2 000 000 shares and the second dividend was 50 per cent franked and paid on 2 500 000shares, we would calculate the total franking credit as [100 * (2 000 000/4 500 000)] + [50 * (2 500 000/4 500 000)] = 72.22 per cent franked.

15 We exclude some forms of buybacks from the analysis. These include: selective buy-backs, minimum holding buybacks and employee buybacks because such buybacks areundertaken for reasons other than distributing excess cash.

16 Results in Brown and ODay are also consistent with firms using funds for buybacksthat would otherwise have funded a larger dividend increase.

17 On-market buybacks are typically used by young firms that have paid little or no Aus-tralian tax. They are a tax efficient means of returning cash to shareholders if the firm hasnot paid tax. Shareholders taking part in the buyback will be assessed for capital gainsrather than income tax. On-market buybacks could also be used by firms that, after mak-ing their regular dividend payment, have excess cash but limited franking credits.




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Firms use off-market buybacks to distribute large amounts of cash and frank-

ing credits.18 Less than 0.3 per cent of firms in each year undertake an off-market

buyback. The average off-market buyback amount is $300 million, much larger

than the average dividend amount of $39 million. The majority of firms usingoff-market buybacks also pay dividends (77 per cent or 17 firms out of 22).

Given the amount of cash returned and size of the tax credits, firms repurchasing

shares off-market are likely to be mature. The availability of high levels of frank-

ing credits suggests a firm has been previously profitable. To provide preliminary

evidence on this, we compare firms that repurchase shares off-market to firms

that do not repurchase shares off-market. Untabulated descriptive statistics show

that off-market buyback firms are extremely large, profitable and have less

growth options than firms that do not engage in buybacks. The percentage of

tax paid is close to the effective tax rate (i.e., 30 per cent). Because of the smallnumber of firms engaging in off-market buybacks, we do not undertake further

multivariate tests for them.

To provide evidence on the determinants of the likelihood of a firm engaging

in an on-market buyback, we adopt a similar methodology to that employed in

investigating dividend payments. That is, we use the Fama and MacBeth (1973)

methodology and estimate annual logit regressions where the dependent variable

takes the value of 1 if a firm engages in a buyback during the financial year and

zero otherwise, as follows:

BUYBACKi;t a0 b1RETAi;t b2TETAi;t b3SIZEi;t b4ROAi;t

b5ASSETGROWi;t b6CASH=TAi;t1 b7DIVi;t

b8RETURNi;t1: 2

Unlike equation (1), our buyback regression includes current period dividends

rather than lagged dividends. If buybacks are substitutes for dividends, then we

would expect a negative coefficient on DIVi,t; whereas if they were complements,

we would expect a positive coefficient on DIVi,t. We also include a measure of

market-adjusted return (RETURN) to capture potential overvaluation influenc-

ing the likelihood of a buyback. RETURN is measured as the market-adjustedannual buy and hold return for firm i in year t)1. The All Ordinaries Accumula-

tion Index is used as the market return.

18 The stated reasons for undertaking an off-market buyback are usually capital mainte-nance related. For example, in their 2004 off-market buyback announcement, Telstraadvised this was part of their 3-year plan to return capital to shareholders. Participantswould benefit from the fully franked dividend component and non-participants wouldbenefit from enhancement in key ratios. Off-market buybacks with a franked dividendbenefit low-tax payers (i.e., a marginal tax rate less than the company tax rate of30 per cent). Therefore, the offer is usually taken up by institutional investors such assuperannuation funds rather than retail investors. In 2004, the ATO reduced the attrac-tiveness of off-market buybacks by deeming that the capital component of the buybackwould be determined by market price.




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3. Corporate payout policy in Australia

3.1. Data and sample selection

We source data from three key sources. Financial statement data are taken

from the Aspect financial database. Dividend data are sourced from the Share

Price and Price Relative (SPPR) database and Aspect.19 Special dividends are

identified using both the Aspect financial database and cross-checked against

Signal G announcements.20 We subtract the special dividend payment from total

dividends paid to obtain ordinary dividends paid. If the company has a dividend

reinvestment scheme, we manually cross check (and adjust as necessary) against

dividends paid as reported in the cash flow statement. For all firms distributing

unfranked dividends, we investigate whether the firm is eligible to accrue frank-ing credits. The level of franking (FRANKING) on dividends paid is calculated

by taking the weighted average level of franking.21

ASX Signal G announcements are used to identify share buybacks. The ASX

has standardised appendices that firms must lodge when announcing, undertak-

ing, changing and ending a buyback. We use the buyback appendix numbers as

well as a key word search over all Signal G announcements to identify buyback

announcements.22 Signal G announcements are used to identify the initial

announcement date, and we check whether shares were actually repurchased

(i.e., cash distributed). As off-market, selective, employee and minimum holding

buybacks usually occur over a short period, the total cash paid out is typically

collected from the final announcement. On-market buybacks can occur over sev-

eral financial periods, so we collect the amount of cash distributed during the

year in the form of buybacks from the cash flow statement. Note that we exam-

ine buybacks that were actually undertaken, not those intended to be under-

taken, as evidenced by a firm lodging a buyback announcement (i.e., not simply

an intention to buy back).

Our initial sample is drawn from Aspect between January 1993 and June

2004. Observations must have operating income, total assets and book value

of equity data available. We begin with 14 946 such firm-year observations.Observations missing any required data items required for our tests are

excluded. Companies that change financial year-end dates are also excluded.

This results in the removal of 5632 observations. The sample used to

19 SPPR is maintained by the Centre for Research in Finance, Australian School of Busi-ness, UNSW.

20 SPPR does not identify whether a dividend paid is a regular or a special dividend.

21

See footnote 14 for more details.22 Key words include: buyback; off-market buyback; equal access buyback; on-marketbuyback; selective buyback; odd-lot buyback; minimum holding buyback; and employeebuyback.




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document corporate payout policy in Australia has 9314 observations. A con-

cern about the sample selection is that our data requirements bias our sample

towards larger, older and more profitable firms. To address this, we calculate

the difference in size between our sample firms and the Aspect population gen-erally for each of our sample years. The average size of our sample firms (as

measured by total assets) is just over 12 per cent larger than the Aspect popu-

lation generally. However, Aspect itself does not provide complete coverage of

all Australian listed firms; its coverage of the population of listed firms

increases over our sample period.23 This again likely biases the early years of

our sample towards larger firms. Relative to the industry composition of the

S&P All Ordinaries Index as at August 2000, our sample of firms is over-

weight in Materials and Energy and underweight in Consumer Discretionary

Firms as well as Financial and Property Trusts and Information Technologyand Telecommunications. See Appendix I for more details.

For our tests of the determinants of corporate payouts, we remove 1476 finan-

cial institution firm-years (ASX code 16, 17, 19 or 20/GICS40) given the unique

rules governing revenue and expense recognition for these firms. This results in a

final sample consisting of 7838 observations.

3.2. Frequency of corporate payouts

In Table 1, we show the frequency of regular dividends, special dividends,

on-market buybacks, off-market buybacks, selective buybacks, minimum-parcel

buybacks, employee buybacks and other forms of share buybacks.24 Payouts

are classified by year (Panel A) and industry (Panel B). Regular dividends

remain the most common distribution mechanism. There has been a slight

decline in the number and proportion of dividend payers since the relaxation

of laws regulating buybacks in 1998.25 However, buybacks are not a perfect

substitute for dividends (e.g., da Silva Rosa et al., 2002; Brown and ODay,

2007; Skinner, 2008).

23 Using data that shows the number of firms listed on the ASX at year end from SPPR,the Aspect database covers 38 per cent of ASX listed firms in 1993, 50 per cent in 1994,over 60 per cent from 19962001 and over 70 per cent of listed firms beyond 2002.

24 The first five categories of buybacks correspond to the five types of share buybacksrecognised by legislation. Section 257B (2), (3) of the Corporations Act 2001 defineson-market and equal access buybacks, and the other types of buybacks are contained insection 9. The last category other share buybacks identifies buybacks of other types ofshares (i.e., redeemable preference shares).

25 The rules were amended by the Corporation Law Review Act 1998. The key reformsintroduced in were allowing buybacks of redeemable preference shares; a new (but lessstringent) solvency requirement; and removal of court approval for share capital reduc-tions (Dharmawan and Mitchell, 2001).




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Table1

Frequencytable

N

Regular

dividends

Special

dividends

On-market

buyback

Off-

market

buyback

Selective

buyback

Minimum

parcel

buyback

Employee

buyback

Other

buyback

n

%

n

%

n

%

n

%

n

%

n

%

n

%

n

%

PanelA:Frequencybyyear

1993

397

93

23.3

1

0.3

0

0

.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

1994

574

244

42.5

9

1.6

0

0

.0

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

1995

642

296

46.0

4

0.6

1

0

.2

0

0.0

0

0.0

0

0.0

0

0.0

0

0.0

1996

715

314

43.9

9

1.3

10

1

.4

1

0.1

0

0.0

0

0.0

0

0.0

0

0.0

1997

795

346

43.5

9

1.1

21

2

.6

2

0.3

2

0.3

2

0.3

1

0.1

1

0.1

1998

785

346

44.0

18

2.3

39

5

.0

2

0.3

9

1.1

2

0.3

0

0.0

1

0.1

1999

806

337

41.8

19

2.4

53

6

.6

5

0.6

6

0.7

4

0.5

3

0.4

2

0.2

2000

798

312

39.0

27

3.4

47

5

.9

5

0.6

4

0.5

2

0.3

4

0.5

4

0.5

2001

882

322

36.5

29

3.3

46

5

.2

9

1.0

7

0.8

4

0.5

2

0.2

5

0.6

2002

996

341

34.2

14

1.4

60

6

.0

1

0.1

8

0.8

5

0.5

4

0.4

2

0.2

2003

1038

377

36.3

16

1.5

63

6

.1

3

0.3

5

0.5

7

0.7

3

0.3

5

0.5

2004

886

310

34.9

15

1.7

45

5

.1

6

0.7

2

0.2

8

0.9

1

0.1

2

0.2

Total

9314

3638

39.0

170

1.8

385

4

.1

34

0.4

43

0.5

34

0.4

18

0.2

22

0.2

PanelB:Frequencybyindustry

Energy(10)

581

108

18.6

7

1.2

4

0

.7

1

0.2

0

0.0

5

0.9

1

0.2

0

0.0

Materials(15)

3223

596

18.5

28

0.9

76

2

.4

4

0.1

11

0.3

12

0.4

2

0.1

1

0.0

Industrials(20)

1166

661

56.7

34

2.9

42

3

.6

0

0.0

8

0.7

2

0.2

0

0.0

1

0.1

Consumer

discretionary(25)

985

565

57.4

37

3.8

52

5

.3

7

0.7

10

1.0

3

0.3

5

0.5

6

0.6

Consumerstap

les(30)

481

352

73.2

7

1.5

29

6

.0

4

0.8

2

0.4

1

0.2

0

0.0

7

1.5

Healthcare(35)

508

138

27.2

4

0.8

17

3

.3

2

0.4

1

0.2

1

0.2

0

0.0

2

0.4

Financials(40)

1527

1028

67.0

43

2.8

134

8

.7

14

0.9

4

0.3

4

0.3

0

0.0

3

0.2

Information

Technology(45

)

606

130

21.5

5

0.8

29

4

.8

1

0.2

6

1.0

5

0.8

3

0.5

1

0.2

Telecommunications(50)

174

17

9.8

3

1.7

1

0

.6

1

0.6

0

0.0

1

0.6

2

1.1

0

0.0

Utilities(55)

63

43

68.3

2

3.2

1

1

.6

0

0.0

1

1.6

0

0.0

5

7.9

1

1.6

Total

9314

3638

39.0

170

1.8

385

4

.1

34

0.4

43

0.5

34

0.4

18

0.2

22

0.2

Sampleconsistsof9314observationsselectedfromASPECTover19932004.




13/27

An average of 39 per cent of our sample firms pay dividends in any year.26

Fama and French (2001) report 23.6 per cent of United States firms pay dividends

between 1993 and 1998.27 As previously discussed, our data requirements result in

our sample consisting of larger firms than the overall ASX population. However,if we draw a sample of firms from the Aspect database that only require firms

have positive total assets, we find that an average of 38.2 per cent of firms pay a

dividend in any given year (there has been a decline from the mid-40 per cent fig-

ures in the middle of the 1990s to the low 30s in the start of the 2000s). Again, note

also that the number of firms both listed on the Australian Stock Exchange as well

as covered by the Aspect database have increased over our sample period. It is

likely therefore that our figure of 39 per cent overstates the proportion of ASX-

listed firms that paid dividends in a year during our sample period.

The frequency of dividend payment by industry is shown in Panel B ofTable 1. The proportion of dividend payers in each industry is likely to be

explained by size, profitability or growth opportunities of member firms (Fama

and French, 2001). Firms in the consumer staples, financial and utilities sectors

have a high proportion of dividend payers. The telecommunications (mean firm

age of 9 years) and information technology (mean firm age of 10) sectors tend to

have a large number of start-ups which are less likely to pay dividends. Similarly,

Australia has a large number of listed mining stocks in the exploratory phase

with high growth potential but little revenue. This helps explain the low propor-

tion of dividend payers in the energy and materials sector.

On average, 1.8 per cent of sample firms declare a special dividend each year

(Table 1, Panel A). This level has stayed fairly constant over the sample period,

although there was a spike between 1998 and 2001.28 Firms often use special div-

idends to distribute excess franking credits. They are more likely to be paid by

mature firms or following a change in the corporate tax rate.

Legislation allowing companies to repurchase their shares was introduced in

Australia in 1989; however, there are no buybacks in our sample until 1995.29

26

This is consistent with a large number of sample firms having negative retained earn-ings. Dividends must be paid out of profits (Corporations Act 2001 s.254T) however profitis not defined. Current period losses discourage but do not prevent firms from paying adividend.

27 See section 4.1 for more details.

28 Balachandran and Nguyen (2004) report that the incidence of special dividends hasincreased in Australia. However, their sample ends in June 2002.

29 Section 129(1)(b)(ii) of the Companies Act 1981 prohibited a company from acquiringits own shares. In 1989, the federal parliament passed the Companies Amendment Act1988 to amend the Companies Act 1981 to allow buybacks. These provisions were subse-quently rolled into the Corporations Law (Lavarch, 1994). Harris and Ramsay (1995)report that in the 6 years following the legalisation of buybacks (i.e., 19891995) only35 buybacks were announced and they tended to be by smaller companies (i.e., averagecapitalisation of $23 million).




14/27

This coincides with legislative amendments which provided that directors

were no longer required to make a declaration of solvency when undertak-

ing a buyback.30 On-market buybacks are more likely to be used by firms

that are just establishing profitability or firms that have paid less tax buthave excessive cash. There is another spike in buyback activity in 1998

when the Corporations Law was again amended to relax buyback require-

ments, greatly reducing the administrative costs of engaging in a buyback

(see footnote 24 for details of the change in legislation). Since 1998, about

6 per cent of sample companies buy back shares on the open market in

any year.

3.3. The size of cash distributions

Table 2 displays the mean and median amounts in nominal dollars for each

class of corporate payout classified by year (Panel A) and industry (Panel B).

Note that the mean and median figures (for each class of payout) are based only

on the firms making that particular payout. For example, the median regular

dividend payment of $4.8 million in 1993 relates to the 93 firms that paid a regu-

lar dividend that year.31 Panel C of Table 2 summarises payout amounts for the

20 largest sample firms by year.

Comparing the mean and median payouts shows Australian dividend payouts

are highly skewed (consistent with firm size in the Australian market being highly

skewed). The average dividend payment is $50.1 million over the sample period,

while the median dividend payment is $6.0 million. Both median (mean) regular

dividend payments steadily increased over the sample period from $4.8 million

($31.5 million) in 1993 to over $7 million ($60 million) in the early 2000s. This is

to be expected as dividends are a regular payment and once started are expected

to be continued.

The median (and average) size of other payments is more variable. Given

buybacks and special dividends are an appropriate mechanism to distribute

temporary spikes in earnings, it is not surprising that payout sizes vary year to

year. The pattern of skewness remains; median payouts are far smaller thanaverage payouts. Off-market buybacks may be infrequent but on average

return large amounts of cash to shareholders; the median (mean) off-market

buyback amount in our sample is just under $160 million ($304 million). This

30 Under the First Corporate Law Simplification Act, shareholder approvals for buybackswere relaxed; auditors were no longer required to provide a report in relation to the buy-back; and directors did not have to make a declaration of solvency. Further, companies

were no longer required to have share buyback authorisation in their constitutions(Lamba and Ramsay, 2005).

31 If we included all firms, the median dividend and buyback amount would be zero eachyear (see panel A of Table 1).




15/27

Table2

Meanandm

ediancashdistributions($millions)

n

Regular

dividend

Spe

cial

dividends

On-market

buyback

Off-market

buy

back

Selective

buyback

M

in.parcel

b

uyback

Employee

buyback

Ot

her

bu

yback

Mean

Median

Mean

Median

Mean

Median

Mean

Median

Mean

MedianM

ean

Median

Mean

Median

Mean

Median

PanelA:Byyear

1993

397

$31.5

$4.8

$

9.0

$9.0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1994

574

$30.3

$4.1

$

9.4

$5.0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1995

642

$37.4

$4.7

$

4.0

$4.0

$516.0

$516.0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1996

715

$39.0

$5.1

$

6.8

$4.1

$55.8

$1.0

$6.0

$6.0

$0

$0

$0

$0

$0

$0

$0

$0

1997

795

$39.7

$5.0

$2

8.8

$27.3

$125.1

$1.1

$5.2

$5.2

$28.3

$28.3

$1.1

$1.1

$0

$0

$3.0

$3.0

1998

785

$44.2

$4.7

$1

4.4

$4.2

$56.8

$1.1

$3

30.6

$330.6

$1188.4

$5.9

$0

$0

$0

$0

$233.0

$233.0

1999

806

$44.6

$6.1

$1

1.1

$7.2

$28.3

$1.5

$2

33.2

$132.5

$51.9

$7.1

$0

$0

$0.7

$0.3

$377.2

$377.2

2000

798

$61.6

$7.0

$9

6.3

$9.9

$76.6

$3.3

$2

11.6

$11.1

$3.2

$2.0

$0.1

$0.1

$0.1

$0.1

$294.2

$5.1

2001

882

$60.8

$7.5

$4

0.8

$8.4

$37.8

$1.5

$3

83.0

$163.2

$1.2

$0.9

$0.1

$0.1

$0.4

$0.4

$101.7

$37.6

2002

996

$69.9

$7.8

$2

0.9

$4.3

$37.0

$1.2

$1

35.3

$135.3

$30.6

$1.7

$0.4

$0.1

$2.5

$0.2

$34.5

$34.5

2003

1038

$67.0

$7.8

$4

6.7

$11.0

$37.9

$2.6

$2

22.1

$131.2

$41.5

$5.9

$11.9

$0.2

$5.4

$0.7

$15.2

$3.1

2004

886

$53.8

$7.1

$1

5.9

$7.3

$35.7

$2.5

$5

29.7

$473.2

$33.4

$33.4

$0.5

$0.2

$1.1

$1.1

$2.2

$2.2

Total

9314

$50.1

$6.0

$3

5.1

$6.9

$49.2

$1.7

$3

03.8

$159.8

$269.9

$2.8

$2.7

$0.1

$1.7

$0.1

$128.4

$11.2

PanelB:Mean

andmediancashdistributionbyindustry($millions)

Energy

581

$44.5

$14.1

$12

3.5

$66.7

$7.7

$0.8

$2

50.0

$250.0

$0.0

$0.0

$0.4

$0.3

$0.3

$0.3

$0.0

$0.0

Materials

3223

$68.1

$12.2

$1

5.6

$11.9

$39.6

$2.8

$43.2

$17.5

$5.4

$0.9

$7.2

$0.2

$0.3

$0.3

$3.9

$3.9

Industrials

1166

$20.0

$3.0

$2

0.7

$5.5

$8.9

$1.3

$0.0

$0.0

$15.7

$3.3

$0.1

$0.1

$0.0

$0.0

$3.1

$3.1

Consumerdisc

riy

985

$17.4

$4.6

$1

6.2

$5.1

$11.3

$0.9

$112.9

$131.2

$60.0

$2.1

$0.1

$0.0

$5.4

$1.1

$372.3

$162.0

Consumerstap

les

481

$40.7

$6.3

$3

6.3

$7.3

$28.6

$2.4

$511.0

$513.1

$315.0

$315.0

$0.3

$0.3

$0.0

$0.0

$24.1

$14.5

Healthcare

508

$20.0

$9.4

$

9.4

$3.3

$30.1

$8.7

$2

61.4

$261.4

$0.5

$0.5

$0.0

$0.0

$0.0

$0.0

$4.2

$4.2

Financials

1527

$76.1

$8.4

$1

1.2

$4.9

$100.1

$1.8

$3

95.6

$285.2

$2536.7

$48.1

$0.1

$0.0

$0.0

$0.0

$125.9

$1.1

Information

Technology

606

$6.2

$2.6

$1

1.8

$3.8

$5.2

$1.1

$0.9

$0.9

$5.8

$1.1

$0.4

$0.1

$0.6

$0.1

$0.0

$0.0

Telecommunic

ations

174

$915.4

$311.3

$81

5.6

$386.0

$0.0

$0.0

$1009.0

$1009.0

$0.0

$0.0

$1.4

$1.4

$0.2

$0.2

$0.0

$30.2

Utilities

63

$48.6

$5.2

$4

1.4

$41.4

$4.1

$4.1

$0.0

$0.0

$7.5

$7.5

$0.0

$0.0

$0.0

$0.0

$30.2

$30.2

Total

9314

$50.1

$6.0

$3

5.1

$6.9

$49.2

$1.7

$3

03.8

$159.8

$269.9

$2.8

$2.7

$0.1

$1.7

$0.1

$128.4

$11.2




16/27

Table2(con

tinued)

n

Regular

dividend

Special

dividends

On-market

buyback

Off-market

buyback

Selective

buyback

Min.parcel

buyba

ck

Employee

buyback

Other

buyback

Mean

Median

Mean

Med

ian

Mean

Median

Mean

Median

Mean

Median

Mean

Median

Mean

Median

Me

an

Median

PanelC:Mean

andmediancashdistributionsforthelargest20samplefirmsbyyear($millions)

1993

20

$119.0

$77.0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1994

20

$216.3

$137.4

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1995

20

$334.6

$220.4

$0

$0

$25.8

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1996

20

$356.9

$235.6

$0

$0

$27.3

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

1997

20

$402.7

$234.5

$0

$0

$108.1

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

.2

$0

1998

20

$468.7

$240.4

$0

$0

$99.4

$0

$32.5

$0

$531.6

$0

$0

$0

$0

$0

$11

.7

$0

1999

20

$439.8

$243.8

$0

$0

$54.7

$0

$32.5

$0

$0

$0

$0

$0

$0

$0

$37

.0

$0

2000

20

$603.5

$334.8

$106.3

$0

$146.5

$0

$52.3

$0

$0

$0

$0

$0

$0

$0

$58

.3

$0

2001

20

$597.8

$244.8

$17.3

$0

$64.8

$0

$52.5

$0

$0

$0

$0

$0

$0

$0

$23

.4

$0

2002

20

$775.8

$408.0

$10.3

$0

$85.1

$0

$0.0

$0

$1.8

$0

$0

$0

$0

$0

$0

$0

2003

20

$767.2

$324.9

$27.0

$0

$86.6

$0

$26.7

$0

$0

$0

$0

$0

$0

$0

$0

$0

2004

20

$528.4

$277.1

$5.1

$0

$30.1

$0

$131.2

$0

$0

$0

$0

$0

$0

$0

$0

$0

Total

240

$467.6

$240.1

$13.8

$0

$60.7

$0

$27.3

$0

$4.4

$0

$0

$0

$0

$0

$10

.9

$0

Tableshowsmeanandmediancashdistributions(in$millions)offirmsthatmadeaparticulardistributiondu

ringayear.Samplecomprisesof9314firms

selectedfrom

AspectovertheperiodJanuary

1993toJune2004.

Thelargest20samplefirmsaredeterminedby

thevalueofmarketcapitalisation

atthestart

oftheyear.




17/27

is not unexpected given the tax efficiency of off-market buybacks.32 Participa-

tion in off-market buybacks is particularly popular among low-tax payers such

as superannuation (pension) funds.

Superannuation (i.e., pension) coverage amongst Australian employeesexpanded rapidly following the 1986 National Wage Case. There was a major

change to the Australian superannuation system in 1992, whereby employers

were required to make tax-deductible contributions on behalf of their employees

(known as the Superannuation Guarantee). Initial employer contributions were

3 per cent of salary, with higher levels of contribution phased in over 10 years to

the maximum of 9 per cent in 2002/2003. Superannuation in Australia has been

a preferentially taxed form of savings. From 1 July 1998, a 15 per cent tax was

applied to investment income of superannuation funds (as well as to employer

contributions and deductible member contributions). The tax on investmentearnings could be offset against imputation credits on franked dividends.33

Superannuation assets (savings) have grown rapidly from $245.3 billion in June

1996 to $643.0 billion in June 2004 (Australian Bureau of Statistics, 5206.0, Aus-

tralian National Accounts, Table 30). As a result, superannuation fund invest-

ments in the equities market have become increasingly important over the

sample period.

The average amount of cash necessary to clean up the share registry (mini-

mum parcel buyback) and to give staff a cost-effective way to sell small parcels

of employee shares (employee buybacks) is small (under $3 million for a mini-

mum parcel buyback and $1.7 million for an employee buyback). Selective buy-

backs can be used to buy out a key stakeholder. Thus, while small in number the

amount of cash used to repurchase a stake can be quite substantial.34

As shown in Panel B of Table 2, the telecommunications industry dominates

regular and special dividends, as well as off-market buybacks. The financial ser-

vices and materials industry have high average dividend payments courtesy of

the largest Australian firms residing in these sectors (i.e., the major banks in the

financial services industry; and BHP-Billiton in the mining industry). The utilities

industry has (after telecommunications) the highest median (regular) dividend

payment; consistent with firms in this industry being relatively mature.In Panel C of Table 2, we address the relative importance of the payout poli-

cies of our largest 20 sample firms by market capitalisation (each year). The aver-

age (median) regular dividend for our largest 20 sample firms over the sample

period is $467.6 million ($240.1 million). This shows the importance of dividend

32 Off-market buybacks can include a fully franked dividend as part of the capital consid-eration.

33

For more details see APRA (2007).34 For example, when the federal government privatised its final stake in the Common-wealth Bank in 1997, the sale of shares also involved a special buyback of 100 millionshares at a total value of $10 008 486 673.




18/27

payments by the largest firms; recall that the mean (median) regular dividend for

dividend paying firms in our full sample is $50.1 million ($6.0 million) from

Panel A of Table 2. However, the largest firms do not dominate the payment of

special dividends; similarly, the largest 20 firms are not as relatively important interms of their payouts from share buybacks as from regular dividends.

3.4. Total cash distributions

In Table 3, we report total cash distributions for each class of payment by year

(Panel A) and industry (Panel B). In terms of frequency, on-market buybacks

are the most popular form of buyback (see Table 1). Almost $20 billion was

returned over our sample period via on-market buybacks compared with just

over $10 billion for off-market buybacks.Nonetheless, the aggregate amount of cash distributed via regular dividends

remains substantially larger (because of a higher proportion of firms paying

dividends) than the cash distributed via share buybacks. From January 1993 to

June 2004, our sample firms paid out $182 billion in dividends and just under

$30 billion in on- and off-market buybacks. In 2003, aggregate dividends were

$25 billion and aggregate buybacks just over $3 billion. This is in contrast to the

United States where in 2004 (for industrial firms) aggregate buybacks were

US$155 billion, while aggregate dividends were around US$137 billion (Skinner,

2008).

4. Results

Table 4 summarises annual logit regressions that test whether the probability

that a firm pays dividends depends systematically on the proportion of assets

funded by earned equity (RETA). We show the time-series average of the fitted

logit coefficients and t-statistics. Large and profitable firms are both more likely

to pay dividends (with positive and statistically significant coefficients on SIZE

and ROA), and firms with higher growth options less likely to pay dividends

(negative and statistically significant coefficients on ASSETGROW.35 This isconsistent with prior US and other overseas evidence (Fama and French, 2001;

DeAngelo et al., 2006; Denis and Osobov, 2008).

Consistent with the life-cycle theory and results in DeAngelo et al. (2006), the

likelihood of paying dividends is positively associated with the proportion of

assets funded by retained earnings. The coefficient on RETA is positive and sta-

tistically significant (with a t-statistic for the RETA coefficients of 5.15). The

probability of paying dividends is negatively related to total equity scaled by

assets (TETA). The fact that RETA remains positive and significant when

35 Results are qualitatively similar when we use the market-to-book ratio as an alternativeproxy for firm growth.




19/27

Table3

Totalcashd

istributions($millions)

n

Regu

lar

dividend

Special

dividends

On-mark

et

buyback

Off-market

buyback

Selective

buyback

Min.parcel

buyback

Employee

buyback

Other

buyback

PanelA:Byyear

1993

397

$2

931

$9

$0

$0

$0

$0

$0

$0

1994

574

$7

394

$85

$0

$0

$0

$0

$0

$0

1995

642

$11

071

$16

$516

$0

$0

$0

$0

$0

1996

715

$12

257

$62

$558

$6

$0

$0

$0

$0

1997

795

$13

748

$259

$2626

$10

$57

$2

$0

$3

1998

785

$15

296

$259

$2213

$661

$10696

$0

$0

$233

1999

806

$15

031

$211

$1498

$1166

$312

$0

$2

$754

2000

798

$19

229

$2600

$3599

$1058

$13

$0

$0

$1177

2001

882

$19

590

$1184

$1739

$3447

$8

$1

$1

$509

2002

996

$23

819

$292

$2260

$135

$245

$2

$10

$69

2003

1038

$25

250

$748

$2389

$666

$207

$84

$16

$76

2004

886

$16

676

$239

$1607

$3178

$67

$4

$1

$4

Total

9314

$182

291

$5963

$19005

$10328

$11604

$93

$30

$2825

PanelB:Byin

dustry

Energy(10)

581

$4

806

$865

$31

$250

$0

$2

$0

$0

Materials(15)

3223

$40

594

$436

$3008

$173

$59

$86

$1

$4

Industrials(20)

1166

$13

220

$704

$372

$0

$125

$0

$0

$3

Consumer

discretionary

(25)

985

$9

831

$599

$587

$790

$600

$0

$27

$2234

Consumer

staples(30)

481

$14

338

$254

$829

$2044

$630

$0

$0

$168

Healthcare(35)

508

$2

761

$37

$511

$523

$0

$0

$0

$8

Financials(40

)

1527

$78

281

$480

$13511

$5538

$10147

$0

$0

$378

Information

Technology(45)

606

$

809

$59

$152

$1

$35

$2

$2

$0

Telecommunications(50)

174

$15

561

$2447

$0

$1009

$0

$1

$0

$0

Utilities(55)

63

$2

091

$83

$4

$0

$7

$0

$0

$30

Total

9314

$182

291

$5963

$19005

$10328

$11604

$93

$30

$2825

Sampleconsistsof9314observationsselected

fromASPECTover19932004.




20/27

controlling for TETA indicates that it is not the relative level of equity per se that

drives the dividend decision, but also the mix of internal and external capital.

Total equity can be increased by firms issuing additional share capital, as well as

by earning and retaining profits. Our results suggest that the way the total equity

is generated is important with respect to the payment of a dividend and that divi-

dend payments are more likely from earned rather than contributed capital.

Our model includes controls for the level of cash holdings scaled by total assets

(CASHTA). The expected sign on the coefficient on CASHTA is not clear; largecash holding could be hoarding or could be in anticipation of future positive

NPV projects. Firms can increase their levels of cash by taking on additional

borrowings, raising capital or selling assets (again, in contrast to earnings and

Table 4

Logit analysis of the decision to pay ordinary dividends as a function of the ratio of earned equity to

total assets (RETA) and other variables

Full sampleLargest firmsquintile Middle quintile

Smallest firmsquintile

Average

coefficient t-Statistic

Average


Average


Average


RETAi,t 2.66 5.15 14.38 1.99 3.45 3.42 3.03 3.37

TETAi,t )1.11 )3.62 )5.61 )1.09 )2.98 )2.31 )1.08 )0.37

SIZEi,t 0.37 7.39 )0.47 )0.37 0.24 0.41 2.64 1.13

ROAi,t 2.79 6.21 24.84 2.54 13.05 3.15 15.52 2.36

ASSETGROWi,t )0.69 )2.92 )4.65 )1.01 )1.86 )3.27 )1.44 )0.67

CASH/TAi,t)

3.15)

3.51)

14.71)

2.76)

5.59)

1.13)

25.06)

2.12DIVi,t)1 3.96 21.75 16.84 2.78 5.51 5.75 10.27 3.14

Intercept )7.30 )6.74 10.21 0.37 )4.22 )0.41 )4.95 )1.29

R2 55.6 65.6 56.3 19.5

n 7838 1565 1568 1561

The full sample consists of 7838 observations drawn from the Aspect database (excluding financial

services firms) over 19932004. The dependent variable is 1 in year t if the firm pays an ordinary divi-

dend, 0 otherwise. The average coefficient is the mean value of the fitted coefficients for 12 logit

regressions (one for each year over 19932004). The t-statistics are calculated using the Fama and

MacBeth approach from the time series of fitted logit coefficients and assess the hypothesis that the

expected coefficient value is zero. R2

is the mean pseudo-R2

for the 12 annual logit regressions. Forthe remaining columns, the sample is sorted into quintiles each year based on-market capitalisation

at the start of the year. Analysis is repeated and results reported for the largest, the middle and the

smallest firm quintiles. RETAi,t = retained earnings (Aspect Item 7005) for company i in year

t scaled by total assets (TAi,t) (Aspect item 5090) for company i in year t)1; TETAi,t = total share-

holder equity for company i in year t scaled by total assets (TAi,t) (Aspect item 5090) for company

i in year t)1; MKTCAPi,t = market capitalisation for company i at the start of year t; SIZEi,t =

natural logarithm of MKTCAP; ROAi,t = earnings before interest and tax (Aspect item 8012) for

company i in year t scaled by average total assets for company i in year t; ASSETGROWi,t = total

assets (Aspect item 5090) for company iin year t less total assets in year t)1, all scaled by total assets

for company i in year t)1; DIVi, t)1 = is an indicator variable that takes the value of 1 if the firm

paid an ordinary dividend in year t)

1, 0 otherwise.




21/27

retaining profits). We find coefficients on CASHTA are negative and statistically

significant, which suggests that CASHTA is empirically distinct from RETA

(DeAngelo et al., 2006). Table 4 also confirms that dividend payout policy is

sticky (Lintner, 1956), with the coefficient on our variable capturing the pay-ment of a dividend in the prior year (DIVt)1) positive and highly significant.

To further address the issue of firm size on results, the regression analysis (i.e.,

estimating equation (1)) was repeated after sorting sample firms into quintiles on

the basis of start-of-year market capitalisation. Results are reported in Table 4

for the quintiles containing the smallest firms, the largest firms and the middle

quintile. For each subsample, the coefficient on RETA remains positive and sta-

tistically significant. The sign of the coefficients of the remaining variables are

largely consistent with that for the full sample. Exceptions include SIZE, which

is not statistically different from zero when the sample is partitioned on size, andasset growth (ASSETGROW), which is not consistently different from zero for

all size quintiles.36

As an additional robustness check, we re-estimate equation (1) on the full

panel data using generalised linear model regression (with industry and year

effects) as an alternative to the FamaMacbeth approach, and similar results are

obtained. Coefficients were of the same sign and remained statistically signifi-

cant.37

Results of testing whether the level of franking impacts on the likelihood of a

dividend being paid are presented in Table 5. When we include the level of frank-

ing on prior years dividends (FRANKING) as an additional independent vari-

able, there is little effect on the results shown in Table 4. Coefficient signs,

magnitudes and statistical significance of the independent variables remain quali-

tatively unchanged. The coefficient on FRANKING is positive and statistically

significant. However, the coefficient size is very close to zero, which indicates that

the incremental impact of last years level of franking on the payment of a divi-

dend this year is not strong.

Table 6 reports the estimated probability of firms paying a special dividend.

Consistent with the determinants of regular dividends, larger and more profitable

firms are more likely to pay special dividends as seen by the positive and signifi-cant coefficients on SIZE and ROA. The coefficient on our life-cycle proxy

(RETA) is significant and positively associated with the likelihood of a firm pay-

ing a special dividend. Firm growth is negatively associated with the likelihood

of a special dividend payment. The negative coefficient on CASHTA again indi-

cates that the variable is empirically distinct from RETA. We also include a

dummy variable capturing the prior years dividend policy (DIVt)1). The coeffi-

cient on DIVt)1 is positive, but not statistically significant. This is consistent with

36 Results for the remaining two quintiles are omitted for brevity, but are qualitativelysimilar to results reported.

37 Results available from the authors upon request.




22/27

Table 5

Logit analysis of the decision to pay ordinary dividends as a function of the ratio of earned equity to

total assets (RETA) and other variables including the level of franking

Average coefficient t-Statistic

RETAi,t 2.19 7.60

TETAi,t )1.11 )2.66

SIZEi,t 0.40 7.58

ROAi,t 4.36 4.47

ASSETGROWi,t )0.51 )2.48

CASH/TAi,t )2.70 )3.46

DIVt)1 3.47 16.56

FRANKINGt)1 0.01 3.45

Intercept )7.91 )6.56

R2

0.57

The full sample consists of 7838 observations drawn from the Aspect database (excluding financial

services firms) over 19932004. The dependent variable is 1 in year t if the firm pays an ordinary divi-

dend, 0 otherwise. The average coefficient is the mean value of the fitted coefficients for 12 logit

regressions (one for each year over 19932004). The t-statistics are calculated using the Fama and

MacBeth approach from the time series of fitted logit coefficients and assess the hypothesis that the

expected coefficient value is zero. R2 is the mean pseudo-R2 for the 12 annual logit regressions. For

the remaining columns, the sample is sorted into quintiles each year based on-market capitalisation

at the start of the year. FRANKINGt)1 = Lagged level of franking applied to dividends paid in year

t)1. All other variables are as defined in Table 4.

Table 6

Logit analysis of the decision to pay special dividends as a function of the ratio of earned equity to

total assets (RETA) and other variables


RETAi,t 1.16 2.71

TETAi,t 1.86 2.06SIZEi,t 0.15 5.87

ROAi,t 3.96 2.70

ASSETGROWi,t )1.18 )2.30

CASH/TAi,t )1.54 )1.44

DIVt)1 10.48 2.60

Intercept )18.05 )4.34

R2 0.51

Sample consists of 7838 observations drawn from the Aspect database (excluding financial services

firms) over 19942004. The dependent variable is 1 in year t if the firm pays a special dividend, 0

otherwise. The average coefficient is the mean value of the fitted coefficients for 11 logit regressions

(one for each year over 19942004). The t-statistics are calculated using the Fama and MacBeth

approach from the time series of fitted logit coefficients and assess the hypothesis that the expected

coefficient value is zero. R2 is the mean pseudo-R2 for the 11 annual logit regressions. All variables

are as defined in Table 4.




23/27

the payment of a special dividend being subject to different incentives than that

of an ordinary dividend.

Results of estimating the likelihood of a firm engaging in an on-market buy-

back are presented in Table 7. Consistent with our tests of the likelihood of afirm paying regular or special dividends, firm size and profitability are associated

with an increased likelihood of a firm engaging in an on-market buyback, and

firm growth is negatively associated with on-market buybacks. RETA is signifi-

cantly associated with an increased likelihood of a firm engaging in an on-market

buyback. Firm size and profitability are also associated with an increase in

on-market buyback likelihood. Coefficients on growth (ASSETGROW) and rela-

tive cash holdings (CASHTA) are negatively associated with the likelihood of an

on-market buyback. The coefficient on the relative level of equity (TETA) is

significant at the 5 per cent level.We also address the issue of whether buybacks operate as a substitute or com-

plement for dividends by including a control variable that captures whether the

firm pays a dividend in year t (DIVt). The coefficient on DIVt is positive and sta-

tistically significant. This indicates that engaging in a buyback is not a substitute

for paying a dividend (and that firms paying a dividend are more likely to be

engaging in a buyback. Similar results apply when we use lagged dividend pay-

ments (DIVt)1). The explanatory power of our model is far lower when explain-

ing the decision to buy back rather than the decision to pay a dividend or special

dividend. The determinants of the likelihood of engaging in an on-market

Table 7

Logit analysis of the decision to engage in an on-market buyback as a function of the ratio of earned

equity to total assets (RETA) and other variables


RETAi,t 1.04 2.61

TETAi,t 0.67 0.75

SIZEi,t 0.11 1.42

ROAi,t 1.33 2.17ASSETGROWi,t )1.54 )2.20

CASH/TAi,t )0.58 )0.50

DIVt 1.69 1.24

RETURNt)1 )0.90 )2.19

Intercept 1.04 )5.17

R2 0.08

Sample consists of 6469 observations drawn from the Aspect database (excluding financial services

firms) over 19962004. The dependent variable is 1 in year t if the firm undertakes an on-market

buyback, 0 otherwise. The average coefficient is the mean value of the fitted coefficients for 9 logit

regressions (one for each year over 19962004). The t-statistics are calculated using the Fama and Mac-

Beth approach from the time series of fitted logit coefficients and assess the hypothesis that the expected

coefficient value is zero. R2 is the mean pseudo-R2 for the 12 annual logit. RETURNi,t)1 = market-

adjusted annual buy and hold return for company iin year t)1 where the All Ordinaries Accumulation

Index for the year t)1 is used as the market return. All other variables are defined in Table 4.




24/27

buyback are qualitatively similar to those for the likelihood of paying ordinary

or special dividends.

Untabulated results of panel regressions (with industry and year effects) esti-

mating the likelihood of a firm engaging in an on-market buyback are qualita-tively similar to the FamaMacbeth results reported in Table 7. The sign of the

coefficients are unchanged, and the level of statistical significance is consistent

with the reported results.

Overall, our evidence is consistent with the life-cycle explanation for dividend

payments. Controlling for known determinants of dividend policy (size, profit-

ability and growth), we find that the proportion of assets from earned profits is

positively associated with both the likelihood of a firm paying a regular and spe-

cial dividend but is negatively associated with the level of franking credits paid

on dividends. Our results suggest that the life-cycle theory also explains on-mar-ket share buybacks, but that firms paying dividends are more likely to be engag-

ing in buybacks. This is consistent with the results in Brown and ODay (2007)

who find that in Australia buybacks have not been financed with a reduction in

the payment of ordinary dividends.

5. Conclusion

We carefully document the extent of various forms of corporate payouts for

Australian firms, and also test whether the life-cycle theory (DeAngelo et al.,

2006) explains variation in payout policies of Australian firms. Ordinary divi-

dends remain the most popular way of distributing cash to shareholders,

although buybacks have increased in popularity and size in recent years. Unlike

the US, the aggregate level of buybacks has not yet approached that of the pay-

ment of ordinary dividends. Our results show the importance of dealing with the

size distribution of Australian firms; there is a large difference between median

and mean payments for various forms of corporate payouts, and regular divi-

dend payments are dominated by the largest listed firms.

Our empirical evidence strongly supports the life-cycle theory, that is, dividend

payments reflect firm maturity. There is evidence that those firms paying divi-dends are larger, more profitable, have fewer growth options and higher retained

earnings than nondividend paying firms. We observe a positive relation between

the decision to pay dividends and the proportion of retained earnings to assets,

after controlling for firm size, profitability, growth, cash balances and prior divi-

dend payment history. We do not find evidence that share buybacks have

become a substitute for dividend payments over our sample period.

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