Declining propensity to pay? A re-examination of the lifecycle theory

- The decline in the propensity to pay dividends is not firm specific.
- The decline is due to the changing composition of firms and their payout preferences.
- Since 1982, the propensity to pay has not declined but changed in form.
- The decade a firm goes public is a determinant of payout propensity and form.
- A lifecycle exists within IPO cohorts, as payout propensity increases as firms age.

Our results indicate that the declining propensity to pay is a function of the changing composition of firms over time and not a declining propensity in individual firms themselves. In particular, the propensity to pay is greater than expected following the 2003 dividend tax cut. The decade a firm went public is also a major determinant of its initial payout policy. Finally, while the strength of the relation between earned/contributed capital and payout propensity declines across IPO decades, there is still a lifecycle effect - within a given IPO cohort, the likelihood of payout increases as firms age.