1

Share Repurchase Regulation and Corporate Payout Practices in the UK

by

Elisabeth Dedman*

University of Surrey, UK

Thanamas Kungwal

University of Keele, UK

and

Gilad Livne

University of Exeter, UK

Acknowledgements: this paper has benefitted from the advice and colleagues of many

colleagues, including seminar attendants at Bath Management School, Keele Management

School, and Nottingham University Business School. We are also grateful to comments on

previous versions of this work from the audience members at BAFA and EAA. Special

thanks go to Andrew Stark who has offered much advice over several iterations of the paper.

Remaining errors belong to the authors.

*Corresponding author: e.dedman@surrey.ac.uk

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Share Repurchase Regulation and Corporate Payout Practices in the UK

ABSTRACT

We investigate whether reforms to UK regulations regarding the

repurchase of a company’s own shares has had an effect on the distribution

policies of UK listed firms. Originally, any repurchased shares had to be

cancelled but this requirement was relaxed following reforms in late 2003,

after which companies could hold them as treasury shares. In late 2009, a

further liberalising reform took place, with the lifting of a 10% ceiling on

the proportion of issued shares which could be held as treasury shares. Our

study spans these three regulatory time periods to investigate (a) the

determinants of both dividends and share repurchases from 1994-2013,

and (b) whether the payout practices of UK public companies have

changed following the repurchase reforms. As well as reporting the results

of comprehensive models of the determinants of payout choice, we are able

to conclude that: (i) dividends are not disappearing in the UK, though the

number of firms paying them has reduced; (ii) share repurchases gained in

importance following the first reform but reduced in importance during the

financial crisis; (iii) in contrast to what is observed in the US, share

repurchases are not replacing dividends in the UK.

JEL Codes and Keywords: G35, Payout Policy (Dividends and

Repurchases); G38, Regulation;

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Share Repurchase Regulation and Corporate Payout Practices in the UK

1. Introduction

The US literature documents a strong trend away from dividends over the last forty years,

with a marked increase in the use of stock repurchases as a corporate payout vehicle over a

similar time period. Pure dividend payers, observed to represent only 6.8% of listed

companies in 2005, have been said to be ‘largely extinct’ in this environment (Skinner,

2008), though a reappearance of dividends per se is documented by Julio and Ikenberry

(2004). Whilst there are many similarities between the US and UK capital markets, the

pattern of payouts in the UK has historically differed to that in the US (Renneboog and

Trojanowski, 2011) with repurchases representing a much smaller proportion of shareholder

distributions in the UK, and conveying a much weaker signal than in the US (Andriosopolous

and Lasfer, 2015). Earlier literature argues that the infrequent use of share repurchases in the

UK is due to the onerous regulation of the practice relative to the US (Rau and Vermaelen,

2002). Dhanani and Roberts (2009) provide a summary of these restrictions and show that

the UK regulation was amongst the most stringent globally. However, more recently, the

regulation surrounding share repurchases in the UK has been relaxed in some important

regards. The Finance Act 2003 abolished the previous requirement for repurchased shares to

be cancelled, while a 2009 amendment to the Companies Act 2006 removed the 10% ceiling

on the number of treasury shares allowed to be held by a company. European regulations also

changed late in 2003, providing safe harbour conditions for member state companies wishing

to trade in their own shares.

Prior UK literature on payout practices has mainly focused on the period prior to these

reforms. This study therefore investigates the effects of these regulatory changes on the

payout practices of UK-listed firms, examining a large sample of companies over three

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regulatory time periods: 1994-2003; 2004-2009; and 2010-2013. Given the tax advantages of

share repurchases, as well as perceived differences in investor expectations of regular

distributions by this method (compared to dividends), reported by US literature, we expect to

observe an increase in the UK use of share repurchases following each liberalising reform. It

will be interesting to investigate whether UK payout practice is now more similar to that of

the US, with the relaxation of UK regulations leading to repurchases replacing dividends.

Our main findings are as follows. First, in line with prior UK literature, we observe a decline

in the propensity of firms to pay out dividends in our earliest time period and up to 2006, the

end of the sample period for prior studies. However, when we extend the period of study

beyond this time, we see the decline slow then largely level off, with an average of 50.3% of

firms distributing regular dividends in our second time period, and 46.5% of firms using this

payout channel in our latest period. Whilst dividends show little sign of disappearing in the

UK after 2004, share repurchase activity increases significantly following the initial reforms.

Although only 8% of sample firms repurchased shares in the period when they had to be

cancelled, a quarter of sample firms were buying back their own shares by 2008, following

the first reform, but prior to the second reform which lifted the 10% ceiling on treasury

shares. The regulatory changes relating to share repurchases do seem to have had an effect

on UK payout policy, though practice still differs markedly from what is observed in the US,

with more dividends and fewer repurchases in the UK. A smaller increase in the proportion

of companies repurchasing their own shares follows the 2009 reform, which is arguably the

less radical change. Although fewer firms distribute dividends over time in the UK, the

average amount paid out by dividend payers exhibits a steady positive trend; as in the US

dividends are becoming more concentrated in the UK. The average amount used to

repurchase shares is much more volatile over time, consistent with share repurchases being

used to distribute transitory excess cash.

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Our second main contribution is our examination of the determinants of payout policy prior

to, and post-reform. We augment models established in prior literature (Fama and French,

2001; Denis and Osobov, 2008), adding variables found to be significantly related to payout

decisions by later authors. We use these more comprehensive models to investigate the

determinants of both dividends and repurchases in a sample of 19,652 firm years over our

three regulatory time periods in the UK.

We find that, consistent with earlier evidence from the US and UK, larger, more mature,

more profitable UK firms remain more likely to distribute dividends. These factors are also

positively associated with the propensity to repurchase shares. Firms with lower market to

book ratios, argued by earlier researchers (Ikenberry, Lakonishok and Vermaelen, 1995) to

indicate undervaluation, are both more likely to issue dividends and to repurchase their own

shares. Consistent with the argument that share repurchases are used to distribute non-

permanent excess cash to shareholders (Dittmar, 2000; Dixon et al., 2008; Lee and Suh,

2011; Oswald and Young, 2008), cash as a proportion of total assets is strongly positively

associated with the likelihood a firm buys back its own shares, but negatively associated with

the likelihood it issues a regular dividend. Consistent with UK research (Dixon et al., 2008)

which finds capital structure rebalancing to be a major motivation for share repurchases, we

find leverage to be significantly associated with the decision to buy back shares. In

examining the determinants of each payout channel independently, we find that the decision

to distribute dividends (repurchase shares) is significantly positively associated with the

adoption of this same payout channel in the prior year, but also with the use of the alternative

payout channel in the current year. We therefore use multinomial regressions to allow for the

payout choices to be simultaneously determined. We find that payout choices have changed

following the share repurchase reforms. Following each reform, the propensity to issue

dividends declines significantly and the propensity to repurchase shares increases

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significantly, ceteris paribus. We therefore reject our null hypotheses that the reforms have

had no effect on the payout decisions of UK firms.

Finally, our data allow us to comment on whether, as appears to be the case in the US, share

repurchases are replacing dividends in the UK. Here, we find that the proportion of total

payouts (dividends plus repurchases) represented by repurchases follows an increasing trend

between 2003 and 2007, where a peak of 49% of total payout being made via share

repurchases is observed. However, this falls dramatically following the financial crisis, to 9%

in 2009 and 11% in 2010. Whilst some recovery is observed for the latter years of our

sample, we argue it cannot be claimed that share repurchases are replacing dividends in the

UK. Further, following a period of steady reduction in this type of firm from 1994-2005,

since 2006 there has remained a stable core of around 29% of sample firms which may be

classed as ‘pure dividend payers’ (Skinner, 2008).

The rest of this paper is structured as follows. Section 2 discusses the regulatory background

to the study, and the reforms to rules governing UK share repurchases in 2003 and 2009.

Section 3 reviews prior literature and introduces our hypotheses. In Section 4 we explain our

research design and in Section 5 we present our analyses of the data. We summarise our

findings and make our conclusions in Section 6.

2. Regulatory Background

Prior to 1981, UK legislation prevented companies from repurchasing their own shares, other

than redeemable preference shares. The prohibition was designed to prevent firms from: (a)

reducing their capital to the detriment of creditors; (b) privileging certain shareholders in off-

market transactions; (c) rigging the market for their shares; and (d) engaging in ‘greenmail’

transactions to ward off takeover threats. Changes made in the Companies Act of 1981,

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however, allowed share repurchases as an alternative distribution channel to UK firms but

with some fairly stringent restrictions. These included: requirements for prior permissions, to

be granted with a limited life; quantitative restrictions with payments to be made from

distributable profits; public disclosure of any repurchase amount and price paid by noon the

following day, with summary figures disclosed in the annual reports; restrictions relating to

timing (to avoid insider trading); and the cancellation of all repurchased shares (Bank of

England, 1988). The Finance Bill 2003 subsequently amended the regulations to allow

companies to retain repurchased shares as treasury stock (Dixon et al., 2008). The

Companies Act 2006, Chapter 6 codifies the changed regulation, which allowed publicly

listed companies to repurchase their own, fully paid up, qualifying1 shares out of distributable

profits and to hold them as treasury shares. As a company is not allowed to own itself,

treasury shares receive no dividends, carry no voting rights, and are not included in the

calculation of weighted average number of shares for earnings per share (EPS) calculations.

The maximum aggregate nominal value of treasury shares allowable to be held was 10% of

the nominal value of the issued share capital of the company at that time (s.725 CA2006).

The 2003 rule change, which came into force in November of that year, introduced a greater

degree of flexibility for firms in the management of their capital. For example, allowing

companies to retain repurchased shares made them available for use in future transactions,

such as acquisitions (Andriosopolous and Lasfer, 2015).

Just a month later, in December 2003, the European Commission passed a regulation which

provided safe harbour to EU member firms in relation to share repurchases. The Market

Abuse Directive (MAD), introduced in January 2003 for adoption by member states by

October 2004, had introduced strict rules on market manipulation, which could have deterred

1 Here ‘qualifying’ refers to a stock being listed on at least one of: (1) the Official List; (2) AIM; (3) an official

European Economic Area market; or (4) any other regulated market.

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firms from repurchasing their own shares. The new EC Regulation provided a set of safe

harbour conditions in relation to share repurchases meeting certain criteria, which enabled

firms to protect themselves from potential penalties arising under MAD (Siems and De

Cesari, 2012). The introduction of safe harbour provisions has been found to coincide with a

significant increase in share repurchase activity in the US (Grullon and Michaely, 2002).

In October 2009, section 725 CA2006 was deleted, removing the 10% ceiling on holding

treasury shares. Now there is no legal maximum to the holding of treasury shares, subject to

the existence of at least one non-treasury share. Listed companies remain bound by rules of

their Stock Exchange, however and, in the case of share repurchases, the London Stock

Exchange imposes restrictions. For firms with a premium listing on the Main Market, the

intention to repurchase over 15% of issued share capital of a particular class triggers the

requirement for a tender offer to all holders of that class on a pro rata basis (Scott, 2014).

This rule does not apply to AIM companies.

This study examines UK payout practices over three regulatory time periods, each with

differing, progressively liberal, rules relating to share repurchases: (1) 1994-2003; (2) 2004-

2009; and (3) 2010-2013. The next section discusses prior literature relevant to our

investigation.

3. Prior Literature

Fama and French (2001) document a steep decline in the proportion of US firms paying

dividends between 1978, when 66.5% of listed firms paid dividends, and 1999, by which time

only 20.8% of firms made such distributions. Further investigation establishes that three

main factors largely determined whether or not a dividend would be paid, with distributions

positively related to firm size and profitability, and negatively associated with measures of

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growth potential (market-to-book ratio and asset growth). DeAngelo, DeAngelo and Skinner

(2004) confirm that the number of US industrial firms which pay dividends continues to

decline slightly beyond the end of the sample used by Fama and French (2001), reporting a

drop of 58.8% in the number of dividend payers from 1978-2000. However, the amount paid

in dividends increased in both real and nominal terms over the same time period, indicating

an increase in the concentration of dividends over time. In the 1990s, there had been a surge

in the number of US firms returning cash to shareholders via share repurchase programmes

(Julio and Ikenberry, 2004). Grullon and Michaely (2002) therefore examine the association

between share repurchases and dividends over a similar time period to Fama and French

(2001). They report that aggregate expenditure on share repurchase programmes increased

from 4.8% of aggregate earnings in 1980 to 41.8% in 2000. The number of firms

repurchasing shares also increased, from 31% in 1972 to 80% in 2000. They argue that total

cash distributions (i.e. repurchases plus dividends) remain fairly constant over their 20-year

time period but that the mix has changed, with firms favouring repurchases over time.

Further evidence of a substitutive relationship between dividends and share repurchases

emerges when they adapt the model developed in Lintner (1956)2 to predict firm dividend

payments3 and find that firms which pay lower dividends than expected spend more on share

repurchases. The market also provides supportive evidence, responding less negatively to

announcements of dividend cuts in firms which spend more on share repurchases.

Addressing one of the unanswered questions from Fama and French (2001) – why did firms

not substitute dividends earlier (given the tax advantages of share repurchases)? – Grullon

2 In the standard model below, the coefficient on lagged payout is the (negative of the) speed of adjustment

coefficient while the coefficient on earnings is the product of the target payout ratio and the speed of adjustment

coefficient (Skinner, 2008) ∆𝐷𝐼𝑉𝑡 = 𝛼0 + 𝛼1𝐸𝑡 + 𝛼2𝐷𝑡−1 + 𝜇𝑡 3 𝐸𝑅𝑅𝑂𝑅𝑡,𝑖 = [∆𝐷𝐼𝑉𝑡 = (𝛽1,𝑖 + 𝛽2,𝑖𝐸𝐴𝑅𝑁𝑡,𝑖 + 𝛽3,𝑖𝐷𝐼𝑉𝑡−1,𝑖)]/𝑀𝑉𝑡−1,𝑖

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and Michaely (2002) provide a regulatory justification. Prior to 1982, large scale repurchase

programmes were susceptible to being viewed by the SEC as attempts at price manipulations.

In 1982, however, the SEC’s adoption of Rule 10b-18 provided safe harbour for repurchasing

firms against charges of price manipulation; the removal of this barrier corresponded with a

surge in repurchase activity and coincidental decline in dividend payments. Grullon and

Ikenberry (2000), using a sample from 1980-1999, document a declining dividend payout

ratio but a stable total payout ratio, which suggests US firms were substituting repurchases

for dividends over time.

Skinner (2008) reports evidence to support Grullon and Michaely (2002) and Grullon and

Ikenberry (2000). Examining payout policies in US firms over 26 years to 2005, he finds that

firms are increasingly using share repurchases as a vehicle to distribute cash to shareholders,

often in tandem with regular dividends. Between 1970 and 2005, the proportion of firms

paying only dividends declines from 13.2% to 6.8%, leading Skinner (2008) to assert that

‘Pure dividend payers are disappearing’ [p.587]. Using logit regressions to estimate the

probability a firm repurchases stock in any given year reveals that repurchases are

significantly positively related to profitability (ROA) and negatively related to recent (past 3

years) stock price performance. Managers buy their own stock when accounting performance

is good and the price is low. This is consistent with other US work which finds evidence to

support undervaluation as a primary motivation for share repurchases (Ikenberry et al., 1995).

This study finds repurchases by ‘value’ stock firms, i.e. those with high book-to-market

ratios, are followed by an average 45% abnormal buy and hold return over the next four

years. It seems firms recognise when they are undervalued but the market takes some time to

catch up.

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The evidence from the US is strong and consistent. Dividends are disappearing, and

repurchases are taking their place. Several researchers, recognising that it would be

premature to assume this change is being replicated elsewhere, have investigated trends in

payout policy in other environments, including the UK.

Denis and Osobov (2008) report results from a study of the dividend practices of firms in six

developed countries: US, Canada, UK, Germany, France and Japan. Covering the time

period from 1989-2002, they look at the characteristics of dividend payers, relative to non-

payers, and whether these have changed over time, as well as investigating whether there has

been a non-US decline in the propensity to pay. They find that some of the determinants of

dividends are common across sample countries, where firms are more likely to pay dividends

if they are larger and more profitable, with a higher proportion of earned equity on their

balance sheet. The presence of growth opportunities is mixed in its effect across countries

however, with a positive association with dividends in Germany, France and Japan, but a

mixed or negative relation with dividends in the US, Canada and the UK. They then develop

a model of predicted dividends by estimating an out-of-sample logit model of the

determinants of dividends and applying the coefficients obtained to observations from 1994

onwards. Consistent with earlier US findings from Fama and French (2001), Denis and

Osobov (2008) report that fewer US firms are distributing dividends over time, and that the

difference between actual and expected grows monotonically from 1994 (3.1%) to 2002

(13.6%). Although for all other sample countries bar the UK, fewer dividends are paid than

expected, the size differences between actual and expected dividends outside the US are

scattered through time. In the UK, however, the difference between expected and actual

dividends is negative in four of the nine years tested; around half of the time, UK companies

pay more dividends than predicted by the model. Denis and Osobov (2008) conclude that

there is little evidence of a decline in the propensity to pay dividends in the UK.

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Share repurchases are not included in the study conducted by Denis and Osobov (2008) but

are examined in a European study by von Eije and Megginson (2008). This study uses as its

sample listed companies from the 15 countries which made up the pre-2004 member states of

the European Union (EU) from 1989-2005. They report a large decline in the percentage of

UK listed firms which pay a cash dividend over their time period. They also observe a

coincident (though non-monotonic) increase in the value of share repurchases in the UK, with

values almost doubling around the time of the first repurchase regulatory reform we discuss

in this paper. The average value of total share repurchases for the two years prior to the

reform (2002 and 2003) was €23,131m; for the two years following the reform (2004 and

2005), the average was €44,827.5m. Though increases in repurchase activity were reported

for the other EU member states, the UK was by far the most aggressive purchasing regime,

with around half of all sample repurchases by value being made by UK firms.

In another international study which covers 33 countries, Fatemi and Bildik (2012) report a

general reduction in the percentage of firms distributing dividends each year. For the UK,

there was a monotonic decline from 99% in 1985 to 43% in 2006, which was not atypical of

the sample countries overall. The determinants of a cash dividend payment are relatively

stable over time, with annual logit regressions on the full sample showing that the likelihood

a firm distributes a cash dividend is positively related to firm size and earnings, and

negatively related to asset growth. In common with the US findings of Fama and French

(2001), Fatemi and Bildik (2012) find that the steep decline in propensity to pay dividends is

only partially explained by a change in the characteristics of listed firms over time. In

contrast with Denis and Osobov (2008), Fatemi and Bildik (2012) conclude that ‘the

phenomenon of disappearing dividends… … is global’. [p.677]

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Focusing on UK firms, Renneboog and Trojanowski (2011) examine dividend and share

repurchase behaviour for a sample of firms from 1992-2004. An interesting feature of their

sample period is that it includes an important change to the UK tax system, which occurred in

1997 and which negated a strong preference for many large institutional investors (pension

funds and charities) for companies to pay out earnings as dividends rather than retaining them

in the firm. The data indicate a significant decline in the propensity of UK firms to distribute

cash dividends, with a fall from 84% of firms in 1992 to only 78% in 2004. Earlier empirical

evidence of pension funds shifting from a preference for dividends over capital gains to

indifference between the two is provided by Bell and Jenkinson (2002). The later sample of

Renneboog and Trojanowski (2011) provides contrasting results, however, with the

association between tax-exempt institutional investors and the likelihood a firm pays

dividends only significant in the post-1997 time period. A rigorous set of robustness checks

fails to find evidence of a tax-clientele effect and so a tax explanation for the declining

propensity to issue dividends is rejected for the UK, in contrast to the evidence from the US

(Julio and Ikenberry, 2004). Renneboog and Trojanowski (2011) also observe a marked

increase in the proportion of firms repurchasing shares (from 5% in 1992 to 16% in 2004)

and an increase in the proportion of companies making no distribution to shareholders (from

16% in 1992 to 22% in 2004).

Dittmar (2000) examines the determinants of share repurchases in the US. As Ikenberry et

al. (1995) show that the market-to-book (MTB) ratio provides a measure of undervaluation,

with low MTB firms earning abnormal returns in subsequent periods, Dittmar (2000)

includes MTB as an explanatory variable in his model. He also tests whether firms are using

share repurchases to move towards a desired capital structure by including leverage as an

independent variable, as well as adding cash measures to examine whether repurchases are a

way to distribute cash to shareholders. Results of annual regressions from 1977-1996

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consistently show that the propensity to repurchase shares is positively related to firm size,

cash and cash flows, and leverage, and negatively associated with MTB. Dittmar (2000)

concludes that US firms repurchase stock to take advantage of undervaluation, to distribute

excess cash and to alter their capital structures. Having included dividend payout ratios in his

regressions, with no regular, significant association observed between these and share

repurchases, he is also able to assert that ‘repurchases do not replace dividends’ [p.354].

To investigate the motivations for share repurchases in the UK, Dixon et al. (2008) survey

the finance directors of large listed companies, including both repurchase and non-repurchase

firms. At the time of the survey, repurchased shares had to be cancelled, which is reflected in

the finding that the most popular given reason for undertaking a repurchase programme was

to attain a preferred, more highly levered, capital structure. The second most popular reason

was simply to return excess cash to shareholders. Very limited support was found for

information signalling or undervaluation by UK firms as a reason for repurchasing their own

shares. Consistent with this result, Andriosopolous and Lasfer (2015) document significantly

lower market reactions to the announcement of share repurchases by UK firms when

compared to their US counterparts. For example, the UK study finds average short run

excess returns of 1.68% compared to 3.54% reported by Ikenberry et al. (1995) in the US.

Andriosopolous and Lasfer (2015) report one of the few studies of UK payout issues with a

sample that straddles our first two regulatory time periods. Interestingly, the share price

response to UK announcements is much weaker following the Finance Act 2003 and

MAD/EC Regulations of the same year. The authors attribute this to share repurchase

announcements containing a weaker signal of firm quality post-reforms. Dhanani and

Roberts (2009) conduct a survey which is administered following the first set of repurchase

reforms in the UK and are therefore able to augment the findings of Dixon et al., (2008).

Dhanani and Roberts (2009) report that the primary motivation for share repurchases, once

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repurchased shares could be retained, was to return excess cash to shareholders, though

optimising gearing levels remained an important consideration, as documented by Dixon et

al., (2008). Other key factors in the repurchase decision were to signal undervaluation

(though managers did not believe that any share price ‘correction’ would be immediate) and

to manage earnings per share (EPS).

We examine the following hypotheses, presented in null form:

Hypothesis 1: The 2003 change in regulations relating to share repurchases had, ceteris

paribus, no impact on the distribution policies of listed firms.

Hypothesis 2: The change in regulations in 2009, had, ceteris paribus no incremental

impact on the distribution policies of listed firms.

We also address the question of whether share repurchases are replacing dividends in the UK.

We use the literature discussed above to develop our models in order to satisfy our ceteris

paribus requirement. The next section provides details of this, our sample selection, and

other aspects of our methodology.

4. Research Design

4.1 Binomial models of the determinants of dividends and share repurchases

Both Fama and French (2001) and Denis and Osobov (2008) model the determinants of a

dividend payment as a linear function of size, market-to-book, asset growth, and profitability:

𝐷𝐼𝑉𝐷𝑈𝑀𝑡 =∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸𝑡

𝑇𝐴𝑡⁄

(1)

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Where: DIVDUM = 1 if a firm pays a dividend, 0 otherwise; SIZE is the percentage of other

sample firms with a smaller market capitalisation of the firm in that year; V/TA is the market

value of total capital divided by total assets and is a measure of growth opportunities; dTA/TA

is the percentage change in total assets over the year; E/TA is earnings before interest but

after tax, deflated by total assets. This is the starting point for our model, to which we add

other variables found to be relevant to the dividend decision.

We also propose an adaptation of their model, with an alternative left-hand side variable to

capture share repurchases: SPDUM = 1 if a firm repurchases shares, 0 otherwise, again as a

starting point for a more comprehensive model.

𝑆𝑃𝐷𝑈𝑀𝑡 =∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸𝑡

𝑇𝐴𝑡⁄

(2)

We then add to equations (1) and (2) further independent variables found to be associated

with dividend distributions by other scholars. Von Eije and Megginson (2008) find an

association between firm age and dividend distributions in Europe so we include firm age

(AGE) as a measure of maturity. As both dividends and share repurchases must be funded

from distributable profits, we include retained earnings (RE) in our models. Prior research

(Dittmar, 2000; Dixon et al., 2008; Lee and Suh, 2011; Oswald and Young, 2008) further

establishes that excess cash is positively associated with share repurchase activity, and

Dhanani and Roberts (2009) find that 81% of repurchases are paid for from existing cash

balances, so we also include a measure of cash and cash equivalents (CASH), which we

deflate by total assets (CASH/TA). We add a lagged dependent variable to the models in

order to measure the persistence of dividends and share repurchases (Lee and Suh, 2011). We

add a dummy variable for the alternative payout method in order to capture whether there is

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an association between the two types of distribution. Earlier research indicates that capital

structure adjustment is a primary motivation for share repurchases, as well as finding a strong

negative association between firm debt and the likelihood of a dividend distribution (Dixon et

al., 2008; Oswald and Young, 2008) in the UK, so we incorporate a leverage variable

(LEVERAGE). In order to test our hypotheses, we then include two dummy variables to

capture the regulatory regime: REGIME2 is a dummy variable which equals one for all

observations after 2003; REGIME3 is also a dummy variable which equals one for all

observations after 2009. Our sample period includes the global financial crisis and periods of

recession for the UK. We reflect these macroeconomic factors in our analyses by including

the calendar year measure of growth in UK gross domestic product (GGDP). Finally, we

control for industry effects by categorising our firms into one of nine industries and

incorporating eight industry dummy variables in our multivariate analyses. Our base models

for the determinants of a dividend distribution or share repurchase are therefore as presented

in equations (3) and (4), respectively:

𝐷𝐼𝑉𝐷𝑈𝑀𝑡 =∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸1𝑡

𝑇𝐴𝑡⁄ + 𝛽5

𝑅𝐸𝑡𝑇𝐴𝑡

⁄ +

𝛽6𝐴𝐺𝐸 + 𝛽7𝐶𝐴𝑆𝐻𝑡

𝑇𝐴𝑡⁄ + 𝛽8𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽9𝐿𝑎𝑔𝐷𝐼𝑉𝐷𝑈𝑀 + 𝛽10𝑆𝑃𝐷𝑈𝑀 +

𝛽11𝑅𝐸𝐺𝐼𝑀𝐸2 + 𝛽12𝑅𝐸𝐺𝐼𝑀𝐸3 + 𝛽13𝐺𝐺𝐷𝑃 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦

(3)

𝑆𝑃𝐷𝑈𝑀𝑡 =∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸1𝑡

𝑇𝐴𝑡⁄ + 𝛽5

𝑅𝐸𝑡𝑇𝐴𝑡

⁄ + 𝛽6𝐴𝐺𝐸

+ 𝛽7𝐶𝐴𝑆𝐻𝑡

𝑇𝐴𝑡⁄ + 𝛽8𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽9𝐷𝐼𝑉𝐷𝑈𝑀 + 𝛽10𝐿𝑎𝑔𝑆𝑃𝐷𝑈𝑀

+ 𝛽11𝑅𝐸𝐺𝐼𝑀𝐸2 + 𝛽12𝑅𝐸𝐺𝐼𝑀𝐸3 + 𝛽13𝐺𝐺𝐷𝑃 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦

(4)

18

Our next two equations substitute the binary dependent variables from (3) and (4) with the

amount disbursed to shareholders via dividends or repurchases, as follows:

log(1 + £𝐷𝐼𝑉𝑡)

=∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸1𝑡

𝑇𝐴𝑡⁄ + 𝛽5

𝑅𝐸𝑡𝑇𝐴𝑡

⁄

+ 𝛽6𝐴𝐺𝐸 + 𝛽7𝐶𝐴𝑆𝐻𝑡

𝑇𝐴𝑡⁄ + 𝛽8𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽9𝐿𝑎𝑔𝐷𝐼𝑉𝐷𝑈𝑀

+ 𝛽10𝑆𝑃𝐷𝑈𝑀 + 𝛽11𝑅𝐸𝐺𝐼𝑀𝐸2 + 𝛽12𝑅𝐸𝐺𝐼𝑀𝐸3 + 𝛽13𝐺𝐺𝐷𝑃 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦

(5)

log (1 + £𝑆𝑃𝑡) =∝ +𝛽1𝑆𝐼𝑍𝐸𝑡 + 𝛽2𝑉𝑡

𝑇𝐴𝑡⁄ + 𝛽3

𝑑𝑇𝐴𝑡𝑇𝐴𝑡

⁄ + 𝛽4𝐸1𝑡

𝑇𝐴𝑡⁄ + 𝛽5

𝑅𝐸𝑡𝑇𝐴𝑡

⁄

+ 𝛽6𝐴𝐺𝐸 + 𝛽7𝐶𝐴𝑆𝐻𝑡

𝑇𝐴𝑡⁄ + 𝛽8𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛽9𝐷𝐼𝑉𝐷𝑈𝑀

+ 𝛽10𝐿𝑎𝑔𝑆𝑃𝐷𝑈𝑀 + 𝛽11𝑅𝐸𝐺𝐼𝑀𝐸2 + 𝛽12𝑅𝐸𝐺𝐼𝑀𝐸3 + 𝛽13𝐺𝐺𝐷𝑃 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦

(6)

4.2 Multinomial models of the determinants of dividends and share repurchases

As the results of testing Equations (3) to (6) will reveal, there is evidence that dividends and

share repurchases are simultaneously determined. We therefore follow the method employed

by Renneboog and Trojanowski (2011) and estimate multinomial logit regressions of payout

choice, allocating observations to payout types as follows: no distribution is coded as

PAYTYPE0; dividend only is PAYTYPE1; share repurchase only is PAYTYPE2; and both

dividends and repurchases are coded as PAYTYPE3. These classifications are consistent with

those employed by Renneboog and Trojanowski (2011). The multinomial models explain

both the likelihood that a firm makes a distribution and the factors affecting its choice of a

19

particular payout method. We use the same independent variables as in our earlier tests

(Equations 3-6). All the variables used in our tests are described in Table 1.

[TABLE 1 HERE]

4.3 Sample and data

Our sample is UK, non-financial firms from 1994-2013. We collect firm-level data from

Datastream via Worldscope, with annual gross domestic product data (GDP) taken from the

Office of National Statistics (ONS). After deleting observations with incomplete data, we are

left with a sample of 19,652 observations. For our pre-change time period, up to the end of

2003, we have 10,154 observations; for our second time period, when repurchased shares could

be kept as treasury shares up to a limit of 10%, there are 6,235 observations; and for our final

regulatory period, from 2010 on, when the cap on treasure shares had been lifted, there are

3,263 observations. Having generated an initial sample of 19,652 firm-year observations with

all the required data, we winsorise continuous variables at 1% and 99% on an annual basis to

mitigate the effects of outlying observations. For variables with many zeros at the bottom end

of the distribution, we only winsorise at 99%. The next section details our analysis of the data.

5. Analysis

5.1 Descriptive Analysis

The first part of our analysis is a simple observation of trends over time, which we compare

to earlier research from the UK and other countries. Table 2 presents descriptive statistics for

our sample firms, split into observations from each regulatory period: 1994-2003 (n=10,154);

2004-2009 (n=6,235); and 2010-2013 (n=3,263). It can be seen from the GDP growth

measure that the first period was the most economically healthy in the UK. The second

20

period includes the recession years of 2008 and 2009 and, unsurprisingly, is the worst time

for economic growth; some recovery is observed in the latest time period. Panel A contains

information about the payout practices of sample firms in each of these periods. DIVDUM is

the proportion of firms which distribute a dividend in the time period – a practice which is

clearly in decline, as observed in earlier work on the UK (Denis and Osobov, 2008;

Renneboog and Trojanowski, 2011). Prior US dividend literature informs us that managers

are reluctant to cut dividends (e.g. Lintner, 1956; Brav, Graham, Harvey and Michaely, 2005)

but we can see a reduction over time in the proportion of UK companies which pay dividends

for two consecutive years (DIVDUM2YR), suggesting dividend payments are becoming less

‘sticky’ in the UK. Over our sample periods, we see substantial growth in the number of

firms which repurchase their own shares (SPDUM), particularly following the first reforms,

which allowed UK companies to retain repurchased shares as treasury shares rather than

cancel them. There is also growth in the proportion of firms repurchasing shares in two

consecutive years, which appears at odds with US findings suggesting repurchases are used

as a vehicle to pay out transitory earnings increases (Skinner, 2008). However, we note that

share repurchase programmes may span two fiscal years so we offer no strong conclusions

here.

The PAYTYPE variables classify firm’s annual distribution policies into four categories. It

can be seen that, over our sample period, a higher proportion of firms make no distribution,

either by dividends or repurchases (PAYTYPE0). As has been observed in the US, but to a

greater extent (Skinner, 2008), distributions to shareholders are becoming more concentrated

in the UK. PAYTYPE1 represents the category of firms which pay only dividends. This drops

from an average of 64% in the time period when repurchased shares had to be cancelled, to

34.6% when they were allowed to be kept in limited number as treasure shares. A

concomitant increase in the proportion of firms which repurchase shares, in isolation

21

(PAYTYPE2) or in conjunction with a dividend distribution (PAYTYPE3) is observed.

Similar, though less extreme, changes occur following the second regulatory change, which

lifted the cap on the holding of treasure shares. More firms made no distribution at all; fewer

paid dividends alone; more made repurchases, with or without dividends.

The amount a firm expends on dividends and repurchases is constrained by the amount that it

holds in retained earnings (RE). Although the proportion of firms issuing regular dividends is

reducing across our sample periods, the proportion of retained earnings being distributed to

shareholders in this manner (£DIV/RE) is increasing. A large proportional increase in the

amount distributed via share repurchases is observed after the first reform, when the

proportion of RE paid for repurchases (£SP/RE) moved from an average of 1% to 1.8%, but

no change is seen following the reform of 2009.

In Panel B, we report the average of the annual median values for our variables for each

regulatory period. As is expected due to the effect of the recession which occurs in the

middle period, the firm value measures (MV, V, TA) are higher for the third period than the

first period, with a dip in the intervening period. Similar patterns are observed for earnings

and retained earnings. Patterns of distributions are reported next in Tables 3 and 4 and in

Figures 1 and 2.

Table 3 and Figure 1 allow us to look at recent trends in dividend distributions in the UK and

compare these to prior studies using earlier samples which several years earlier than the one

employed here (Fatemi and Bildik, 2012; von Eije and Megginson, 2008; Renneboog and

Trojanowski, 2011; Denis and Osobov, 2008).

[Table 3]

[Figure 1]

22

In common with earlier studies, our data indicate a fairly steep decline in in the propensity for

UK firms to pay dividends from 1994, when 88% of our firms paid a dividend, until around

2001, by which time only 59% of sample companies issued a dividend. The trend away from

dividend distributions continues to decline more gradually until the end of our sample period,

2013, when only 44% of sample firms paid a dividend. There is, however, no dramatic

change in the propensity to pay dividends associated with the introduction of more liberal

rules concerning share repurchases in either 2004 or 2009. Figure 1 contains a graphical

comparison of dividend propensities in our sample compared to those of prior papers using

UK data, making it easier to see a levelling off of the declining trend after the end of the

sample periods of these papers.4 Even more steady is the proportion of firms which, since

2006, pay only dividends. Around 29% of companies for the final eight years of our sample

period would be classed as ‘pure dividend payers’ by Skinner (2008). Contrast this to his

observation that only 6.8% of US firms since 2005 fit this description and we can see that

payout policies remain very different in the UK compared to the US.

[Table 4]

[Figure 2]

In Table 4 and Figure 2, we present share repurchase propensities for our sample firms over

time, comparing our results to those of Renneboog and Trojanowski, 2011, and extending

their sample period forward by nine years to 2013, with some interesting results. The trend in

share repurchases increases sharply from 2004 to 2009, following the first set of reforms, and

4 Looking at Figure 1, the pattern observed by Renneboog and Trojanowski (2011) may appear anomalous when

compared to the results of this and other studies until one considers that they require three years of firm data for

sample firms; this likely introduces some element of bias into their sample which differs from any bias in the

samples from other studies.

23

is driven mostly by an increasing tendency for dividend-paying firms to also repurchase their

own shares. There is a small but clear dip in the trend around the time of the UK recession,

then a recovery. The 2013 reduction in the propensity to pay dividends documented in Table

3 and Figure 1 is also accompanied by a reduction in share repurchase behaviour by

dividend-paying firms. Note that this follows a period of very low economic growth, with

UK GDP growth only 0.2% in 2012. The proportion of companies which only repurchase

shares, and do not distribute dividends, continues to slowly increase after the recovery from

the 2008-09 recession.

[Table 5]

[Figure 3]

[Figure 4]

In Table 5, and Figures 3 and 4, we display information relating to the number of sample

firms, how many of them pay dividends or repurchase shares, and how much distributing

firms spend on dividends or repurchases, on average, each year. Although fewer firms are

paying regular dividends over time, the amount being distributed to shareholders in this way

is increasing steadily. This result was reported by Renneboog and Trojanowski (2011) for

1992-2004; we show that the trend continues beyond their sample period. The amount being

used to repurchase shares is more volatile, increasing steeply following the first reform but

decreasing sharply around the time of the UK recession. Although the sample period of

Renneboog and Trojanowski stops short of the repurchase reforms and the recession, they too

report more volatility in average share repurchase expenditure relative to dividend payments.

The average expenditure on share repurchases often exceeds the average expenditure on

dividends over our time period, though, as Figure 5 reveals, the aggregate annual amount

24

spent on repurchases is never greater than that used to distribute regular dividends in our

sample. Prior to the crash of 2008, it appeared that share repurchases may have been about to

overtake dividends by value but the gap between the two has widened since the financial

crisis. The final column of Table 5, and Figure 6, provide further descriptive evidence on the

non-replacement of dividends by share repurchases in the UK, using as its measure the

proportion of total payout made using share repurchases. The final column of Table 5

presents the outcome of dividing aggregate share repurchases for each year by the sum of

aggregate dividends and aggregate share repurchase for each year. Although, prior to the

financial crisis, share repurchases did appear to be gaining in importance as a payout vehicle,

their use relative to dividends, decreased sharply once recession hit the UK, and they have yet

to fully recover to their pre-crisis position. Although firms managed to maintain their

dividends throughout the crisis, on average, funds used to repurchase shares declined

dramatically.

5.2 Multivariate Analysis

Our next set of analyses examines the determinants of the payout decisions made by sample

firms. Table 6 reports the Pearson correlation coefficients between the variables used in these

tests. It can be seen that there is a high correlation (0.835) between the likelihood of a current

year dividend (DIVDUM) and whether a firm distributed a dividend the year before

(LDIVDUM). Such collinearity could cause inflation of standard errors, causing either or

both variables to appear to have no significance in the regressions when, in fact, either or

both have a significant association with the dependent variable. We therefore keep this in

mind for our later interpretation of results. No other pairs of variables display troublesome

correlations.

25

Table 7 reports the results of logistic regressions designed to examine the factors which

determine whether a firm distributes a dividend or repurchases its own shares in a particular

year. The models used are from Equations (3) and (4) which were developed earlier, in

Section 3. Model 1 investigates the determinants of a dividend distribution. Consistent with

the UK findings of Denis and Osobov (2008) and Fatemi and Bildik (2012), we find the

likelihood of a firm distributing a regular dividend is positively associated with its size,

current year earnings, retained earnings, and undervaluation measured as V/TA. Different to

to the results in these two papers, in our sample firms there is a positive relationship between

asset growth and the propensity to issue a regular dividend. We find older UK firms are more

likely to pay dividends, similar to the US findings of DeAngelo, DeAngelo and Skinner

(2008). Cash holdings are negatively associated with dividend payments, and we find no

relationship between leverage and the propensity to issue regular dividends. Supporting

previous research which has identified a reluctance of managers to stop dividend payments

(e.g. Lintner, 1956; Brav et al., 2005; Denis and Osobov, 2008), we find a strong, positive

association between the likelihood of issuing dividends in the current year and whether the

firm had used this distribution channel in the year prior (LDIVDUM). This is consistent with

the dividend stability results for the UK reported by Lee and Suh (2011). Different to UK

research on an earlier sample by Oswald and Young (2008), which reports no association

between dividends and share repurchases, we find a significant positive association between

the odds of distributing a dividend and the likelihood a firm repurchases its own shares in the

same year (SPDUM). Finally, our annual measure of the health of the general economy

(GGDP) is positively associated with the likelihood a firm issues a dividend in a year.

Model 2 of Table 7 investigates the determinants of a share repurchase decision. The results

are consistent with prior literature in several respects. Firms with fewer growth opportunities

(DTA/TA) and more cash (CASH/TA), which are undervalued (V/TA) are more likely to

26

repurchase their own shares, consistent with earlier work by Oswald and Young (2008).

Leverage (LEV) is significantly positively associated with share repurchases, in line with the

findings of Dittmar (2000) and Dixon et al. (2008), that capital structure rebalancing

motivates some repurchase decisions. However, this finding is contrary to that of Lee and

Suh (2011) who report a negative relationship between the £ amount of UK repurchases and

leverage. Our results are similar to those of Lee and Suh (2011), however, in respect of the

positive association between the propensity to repurchase shares in the current year, and

having repurchased shares in the prior year. Similar to dividend paying firms, companies

which repurchase shares tend to have higher earnings, more retained earnings, and are older,

than those which do not repurchase. Our measure of macroeconomic wellbeing (GGDP) is

weakly positively associated with the likelihood of a share repurchase.

Turning to our hypotheses, we wish to assess whether changes to regulation affected the

distribution policies of UK firms, with H1 being concerned with reforms from late 2003, and

H2 relating to reforms occurring late in 2009. Our dummy variables REGIME2 and

REGIME3 are designed to capture each of these rule changes, respectively. It can be seen

that, relative to the pre-reform period, the likelihood of issuing a regular dividend is lower in

both later time periods, while the likelihood of a share repurchase is higher in both time

periods. We can therefore reject H1, which posits there will be no effect on distribution

decisions post-2003. In order to reject H2, we need to test the effects of the 2009 regulations

against the pre-2009 period. To do this, we re-run Models 1 and 2 (Eq.3 and 4) from Table 7,

excluding all observations prior to 2004 and excluding REGIME2. The results, which are not

tabulated, reveal a significant reduction in the propensity to issue dividends in our latest time

period compared to the middle period (coeff. = -0.524, p-value <.0001), allowing us to reject

H2 for dividends. However, in our amended Model 2, the coefficient on REGIME3 for share

repurchases is not significant (coeff. = 0.011; p-value = 0.881). Whilst the propensity to

27

issue regular dividends decreases significantly post-2009, there is no significant change in the

propensity to buy back shares.

Table 8 reports the results of testing Equations 5 and 6, where the value of dividends and

repurchases are substituted as the dependent variables, with all independent variables

remaining as in Table 7. The results of Model 1 reveal some differences between the

determinants of a dividend payment and the factors affecting the amount paid. Although

firms with asset growth are more likely to issue a dividend, the cash amount distributed is

lower for growth firms, on average (DTA/TA). Although firms with higher reported retained

earnings (as a proportion of total assets) are more likely to pay a dividend, there is a negative

association between retained earnings (RE/TA) and the amount paid in the dividend. This is

consistent with more profitable firms regularly paying dividends but not to the full extent of

their profits, so the dividend as a proportion of prior undistributed profit, is smaller for

regular dividend payers. All other associations remain of the same sign as in Table 7. The

results of Model 2 in Table 8 are largely similar to those from Table 7, with one exception.

Table 7 reports a significant negative association between our market to book ratio (V/TA)

and the propensity to repurchase shares, which is consistent with earlier US literature

(Dittmar, 2000) and suggests companies buy back their own shares when they are cheap.

Table 8, however, reports no significant association between the amount repurchased,

log(1+£SP), and V/TA. In terms of H1, we find a significant reduction (increase) in the

average amount spent on dividends (share repurchases) following the first regulatory reform,

allowing us to reject H1 according to this test. The models tested in Table 8 explain 78% of

the variation in the amount paid in dividends and 33.5% of the variation in share repurchase

expenditure. Share repurchases are therefore less well predicted by variables generally

associated with dividend payments.

28

We again re-run the models using only observations from after 2003 to examine whether

REGIME3 is significant compared to REGIME2. We find that the average amount paid in

dividends is lower following the second reform than during our second regulatory period,

with the coefficient on REGIME3 being -0.122 (p = 0.012). For Model 2, the coefficient on

REGIME3 is also negative (-0.092) and marginally significant (p = 0.109). These results do

not support the null hypothesis that there is no change to payout policy following the second

regulatory reform of 2009. We also run Models 1 and 2 on the full sample, substituting the

lag of log(1+£DIV) for (LDIVDUM), and the lag of log(1+£SP) for LSPDUM as independent

variables. We also substitute log(1+£DIV) for DIVDUM and log(1+£SP) for SPDUM on the

right-hand side of the models. We do this to test the strength of the association between the

amount paid by either payout channel in the current year, and the amount distributed in that

way in the previous year, and the amount paid by the alternative channel in the current year.

The coefficients on the lagged amount variables are all positive and highly significant (p

<.0001). Although our univariate tests indicate that dividend stickiness is reducing over time

in the UK, current year dividends remain strongly associated with the amount paid last year.

More interestingly, there is a strong positive association between the amount paid by one

payout method and the amount expended on the other payment method, for the current year.

The higher the dividend, the more is spent on share repurchases, and vice versa. Further, the

more was spent on share repurchases last year, the more will be spend the current year, by the

average firm.

It is apparent from the results in Table 7 and Table 8 that our sample firms consider dividends

and share repurchases simultaneously. We therefore employ a multinomial approach, similar

to that taken by Renneboog and Trojanowski (2011) and present our results in Table 9. In

Panel A, we examine the factors which differentiate firms with any type of payout compared

to firms which pay neither dividends nor repurchase shares. It can be seen that larger firms,

29

and those with lower market values (V/TA) are more likely to issue dividends, or repurchase

shares, or both, as are firms with higher current earnings (E/TA), retained earnings (RE/TA)

and older firms (AGE). As is the case in the US (Dittmar, 2000), it is the more mature firms

which are making distributions to shareholders. Although cash as a proportion of total assets

(CASH/TA) is negatively associated with the likelihood of paying dividends, having more

cash on the balance sheet is positively associated with the chance that a firm will repurchase

its own shares. For firms making both type of distribution, there is no apparent relationship

between this and the amount of cash held. Firms with more debt (LEVERAGE) are less likely

to issue dividends or repurchase shares alone, but there is no association with debt and the

decision to make both types of distribution in the same year.

Turning to variables which provide some information about payout trends, we find that firms

which only distribute a dividend in the current year (PAYTYPE1) are more likely to have paid

a dividend last year (LDIVDUM) but less likely to have repurchased shares. However, last

year’s repurchase decision (LSPDUM), is positively associated with more repurchases in the

current year, whether or not they are accompanied by a dividend (i.e. PAYTYPE2 and

PAYTYPE3). In fact, a dividend payment last year is positively associated with all types of

payout in the current year. The results for growth in GDP (GGDP) suggest that firms are

more likely to pay dividends (alone or along with share repurchases) when the economy as a

whole is performing well, but this does not have a significant association with the decision to

repurchase shares but pay not dividend.

What effect do we observe for our share repurchase regulatory regimes? Looking at the

results for the variable REGIME2 in Panel A reveals that firms are less likely to distribute

dividends alone (PAYTYPE1), and more likely to repurchase shares, either alone or along

with dividends (PAYTYPE2 and PAYTYPE3) following the first regime change, when firms

30

were first allowed to retain repurchased shares as treasury shares, compared to the earlier

period when firms had to cancel any repurchased shares. Following the second change in

regulation, which lifted the cap on the proportion of equity which could be held as treasury

stock, even fewer companies issued dividends alone (PAYTYPE1), while more issued

dividends in conjunction with repurchasing their own shares (PAYTYPE2), and no difference

is observed in the practice of making share repurchases without paying dividends

(PAYTYPE3). Moving on to Panel B, we compare firms which either make a repurchase

alone (PAYTYPE2) or make a repurchase and also issue regular dividends (PAYTYPE3) to

companies which issue dividends alone, with some interesting results. LDIVDUM is

negatively associated with both PAYTYPE2 and PAYTYPE3 so firms which repurchase in the

current year are much less likely to have paid a dividend in the prior year, compared to firms

which issue only a dividend in the current year (PAYTYPE1). Compared to dividend alone

firms, there are more repurchasing firms, whether PAYTYPE2 or PAYTYPE3 following each

share repurchase reform.

We therefore reject our null hypotheses that there has been no change to firm distribution

policies associated with the liberalising of regulation relating to share repurchases in the UK.

On the contrary, allowing UK companies to repurchase shares and hold them as treasury

stock is associated with a contemporaneous decrease in the use of regular dividends and an

increase in the use of share repurchases as vehicles for returning funds to shareholders.

6. Supplementary Analyses and Limitations of the Study

It may be argued that managers do not know current year earnings (and therefore retained

earnings) by the time they declare current year dividends. We therefore repeat the tests in

Table 7, replacing current year profitability (E/TA) and retained earnings (RE/TA) with one-

year lags of the same variables. The lagged variables are positively and significantly

31

associated with the propensity to issue regular dividends and to repurchase shares, though

their coefficients are not as large as those recorded for current year income or retained

earnings. All other variables are qualitatively unaffected. We repeat the exercise with the

models from Table 8, with the same outcome.

Our analyses have assumed that share repurchases are used to distribute part of firm earnings

to shareholders. As is pointed out by Fama and French (2001) and Skinner (2008), not all

repurchases are for this purpose. An alternative reason is to finance transactions such as

those relating to stock option schemes or acquisitions. Once the retention of treasury shares

was allowed after the first reform of November, 2003, this applies to the UK as well as the

US. We make no attempt to differentiate between repurchases for distribution purposes and

those for transactional reasons and this is a limitation of our work.

7. Summary and Conclusions

We track and analyse the distribution policies, with respect to regular dividends and share

repurchases, for a sample of 19,652 UK listed companies from 1994-2013. This time period

includes two regulatory changes, each of which relaxed previously strict restrictions on share

repurchases in the UK. The first, late in 2003, allowed firms to retain repurchased shares as

treasury stock, where the former requirement was for them to be cancelled. The second, in

October 2009, removed a 10% ceiling on the amount of issued equity that could be held as

treasury shares. Our long sample period enables us to comment on the effects of these

changes. The study provides information about: (a) trends in distribution practices in the UK

for a twenty-year time period; (b) the determinants of payout policy in respect of dividends

and share repurchases; and (c) whether, as in the US, repurchases are replacing dividends as

the primary vehicle for returning cash to shareholders in the UK.

32

First, in common with prior UK research, we observe a decrease in the number of dividend-

issuing firms over time. However, we document that the decline has slowed and it does not

appear that dividends are disappearing in the UK, as some previous scholars have suggested.

Unlike in the US, a stable core of around 29% of UK firms pay dividends and only dividends

in recent years. Share repurchases increase in number and value for most of our sample

period, with a particular increase following the first reform which allowed firms to retain

repurchased shares in treasury. However, our evidence does not indicate that share

repurchases are replacing dividends in the UK. Although, as a proportion of total payout,

share repurchases gained in importance steadily up until 2007, the advent of the financial

crisis saw a rapid decrease in the value of share repurchases in the UK, and their recovery

since then has only been partial. In contrast, UK firms have maintained dividends even

through the recession and financial crisis. A reduction in the proportion of dividend-paying

UK firms, but an increase in the average dividend paid by those firms, suggests greater

concentration of dividends in the UK, as has been observed in the US.

We build on earlier models which analysed the determinants of payout policy with some

interesting results. Many of the factors which are associated with the propensity to issue

dividends, also seem to influence firms’ repurchase policies. Larger, more profitable and

mature companies are more likely to make both types of distribution. Firms which are

undervalued are also more likely to return funds to shareholders, while asset growth firms are

more likely to issue dividends but less likely to repurchase shares. Both types of distribution

are more likely when there is positive growth in GDP. Our multivariate analyses support the

indications from descriptive tests that firms which make one type of distribution are more

likely to make the other – there is a positive association between the propensity to issue

dividends and to repurchase shares. There is also a strong positive association between

current payout practice and that of the previous year, suggesting a degree of ‘stickiness’

33

prevails in payout decisions. We therefore use multinomial models to allow for the apparent

simultaneity of the dividend/repurchase decision. They validate the results from our binomial

tests and provide strong evidence that the regulatory changes have affected payout policy in

the UK. Relative to firms which make no distribution, following the first reform of 2003, UK

firms are less likely to issue regular dividends alone, and more likely to repurchase their own

shares, with or without an accompanying dividend. Following the second reform, companies

are less likely to issue dividends alone, and more likely to make repurchases alone, but there

is no change in the likelihood a firm will make both types of distribution, relative to zero

payout companies. Relative to firms which only issue dividends, companies are more likely

to make repurchases, with or without an accompanying dividend, after each reform.

Compared to firms which repurchase only, firms are less likely to issue accompanying

dividends after each reform, but this is only significant following the second rule change,

which lifted the ceiling on treasure shares.

Overall, our study concludes that, although recent reforms have led to an increase in the use

of share repurchases as a vehicle for returning funds to shareholders in the UK, dividends are

not disappearing, and they are not being replaced by repurchases.

34

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36

Table 1: Description of Variables

REGIME A set of 3 dummy variables which indicate the regulatory period during which

an observation occurs: REGIME1 represents observations from 1994 to 2003;

REGIME2 indicates an observation is from 2004 to 2009; and REGIME3

denotes observations from 2010 to 2013.

GGDP This is the annual measure of growth in gross domestic product (GDP)

reported by the Office of National Statistics (ONS).

DIVDUM A dummy variable, coded 1 if the firm pays a regular dividend in the year,

otherwise 0.

LDIVDUM One year lag of DIVDUM.

DIVDUM% Percentage of sample firms paying a regular dividend in the year.

DIVDUM2YR

%

Percentage of sample firms paying a dividend this year and also last year.

£DIV The total value of the common dividends declared for the year (Worldscope item

WC18192 - Dividends Provided for or Paid).

SPDUM A dummy variable, coded 1 if the firm reports it has repurchased its own

shares in the year, otherwise 0.

LSPDUM One year lag of SPDUM.

SPDUM% Percentage of sample firms repurchasing shares in the year.

SPDUM2YR% Percentage of sample firms repurchasing shares this year and also last year.

£SP We measure share repurchases for the year as funds used to decrease the

outstanding shares of common stock (Worldscope item WC04751 -

Common/Preferred Redeemed, Retired, Converted etc). (It is assumed that the

buying back of preference shares is negligible.)

MV Market value represents the market capitalisation at the closing price of the

firm’s share at their fiscal year end (Worldscope item WC08001 – Market

Capitalisation).

SIZE The percentile ranking of the firm in the sample for the year, based upon MV.

BE Book equity is calculated as common equity (Worldscope item WC03501 – Common

Equity) plus non-equity reserves equity if reported (Worldscope item WC03401 –

Non-Equity Reserves).

V Following Denis and Osobov (2008), entity market value is calculated as book

value of total assets (Worldscope item WC02999- Total Assets) minus book

value of equity (BEt) plus market value of equity, where market value of

equity is measured as the closing stock price at fiscal year-end times the

number of shares outstanding (Worldscope item WC08001 – Market

Capitalisation).

TA Total assets is represented by the sum of total current assets, long term

receivables, investment in unconsolidated subsidiaries, other investments, net

property plant and equipment and other assets (Worldscope item WC02999 -

37

Total Assets).

BV Book value is measured as the sum of preferred stock and common

shareholders’ equity at the financial year end (Worldscope item WC03995 -

Total Shareholder’s Equity).

E

Our measure of earnings is net income before extraordinary items and

preference dividends (Worldscope item WC01551 - Income before

extraordinary items and preferred and common dividends, but after operating

and non-operating income and expense, reserves, income taxes, minority

interest and equity in earnings).

RE Retained earnings represents the accumulated after tax earnings of the firm

which have not been distributed as dividends to shareholders and allocated to

a reserve account for the financial year ending in year t (Worldscope item

WC03495 – Retained Earnings).

AGE The number of years since the incorporation of the firm. It is calculated as the

firm’s financial year-end (Worldscope item WC05350– Date of Fiscal Year

End) minus its incorporation date (Worldscope item WC18273– Date of

Incorporation).

CASH Cash is measured by cash and cash equivalents (Worldscope item WC02001 -Cash &

Equivalent).

LEVERAGE

(LEV)

Leverage is measured by total debt (Worldscope item WC03255 – Total debt, divided

by total assets (Worldscope item WC02999 - Total Assets).

PAYTYPE Observations are classed as one of four types: PAYTYPE0 = neither dividend

nor repurchase; PAYTYPE1 = dividend only; PAYTYPE2 = share repurchase

only; PAYTYPE3 = both dividend and repurchase.

38

Table 2: Descriptive Statistics by Regulatory Time Period

Sample period Period 1 Period 2 Period 3

Years 1994-2003 2004-2009 2010-2013

Observations 10,154 6,235 3,263

GDP growth 3.089 0.933 1.663

Panel A: sample period average percentages % % %

DIVDUM 71.174 50.264 46.705

DIVDUM2YR 67.674 45.952 42.472

SPDUM 8.144 19.166 22.464

SPDUM2YR 3.116 11.428 15.344

PAYTYPE0 27.812 46.223 49.035

PAYTYPE1 64.044 34.611 28.501

PAYTYPE2 1.014 3.512 4.260

PAYTYPE3 7.130 15.654 18.204

£DIV/RE 6.5 8.4 14.7

£SP/RE 1.0 1.8 1.8

Panel B: means of median values for each sample period (Age is in years; all undeflated

variables are in £mil)

MV 48.521 41.325 55.944

V 78.390 65.825 91.148

V/TA 1.383 1.407 1.310

TA 50.694 47.002 72.883

E 1.507 0.900 1.421

E/TA 0.044 0.028 0.030

RE 4.064 3.308 8.887

RE/TA 0.136 0.090 0.145

AGE 21.398 12.332 15.708

CASH 3.742 4.565 7.354

CASH/TA 0.074 0.105 0.103

LEVERAGE 0.144 0.115 0.090

(Variables are defined in Table 1.)

39

Table 3: Trends in UK dividend payout policy - % of firms paying a dividend in a year

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

This study: all

div. 88 89 89 72 73 71 65 59 56 57 56 53 49 48 50 46 45 49 48 44

This study: div.

alone 85 86 83 67 63 62 56 51 48 48 46 40 32 30 29 30 29 29 28 28

F&B 84 87 82 76 76 74 64 58 55 53 50 46 43

vE&M 84 86 76 75 76 70 56 54 48 46 45 44

R&T 84 86 85 86 86 84 80 77 76 76 77

D&O 85 87 88 85 85 82 71 61 56

F&B = Fatemi and Bildik (2012). Data extracted from their Table 2A. vE&M = von Eije and Megginson (2008). Data extracted from their Figure 3. R&T = Renneboog and

Trojanowski (2011). Data extracted from their Table 3. D&O = Denis and Osobov (2008). Data extracted from their Table 5.

0

10

20

30

40

50

60

70

80

90

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 1: Trends in UK Dividend Distributions

This study all dividend This study pure dividend F&B vE&M R&T D&O

40

0

5

10

15

20

25

30

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 2: Trends in UK Repurchases

This study: SP only This study: SP+Div This study: Total SP R&T: SP only R&T: SP + Div R&T: Total SP

Table 4: Trends in UK share repurchases - % of firms repurchasing shares in a year

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

This study

SP only 0.34 0.22 0.56 0.19 0.44 0.48 2.10 1.46 1.56 2.60 2.42 3.32 2.98 3.80 3.83 4.93 4.16 4.05 3.71 5.29

SP+Div 2.84 3.40 5.15 5.06 9.71 9.46 9.26 8.32 7.61 8.90 9.89 12.36 16.41 17.83 21.45 16.21 16.63 20.00 19.78 16.17

Total

SP 3.18 3.62 5.71 5.25 10.15 9.94 11.36 9.78 9.17 11.50 12.31 15.68 19.39 21.63 25.28 21.14 20.79 24.05 23.49 21.46

Renneboog and Trojanowski (2011). (Data extracted from their Table 3.)

SP only 0.34 0.22 0.74 0.42 0.39 0.76 1.19 0.90 1.18 1.71 1.37

SP +

Div 4.20 3.87 5.61 8.7 12.2 11.4 13.6 11.6 12.4 13.9 14.6

Total

SP 4.54 4.09 6.35 9.12 12.59 12.16 14.79 12.5 13.58 15.61 15.97

41

Table 5: Number of Sample/Dividend/Repurchasing Firms, and Amounts Spent on Distributions, by Year

Year

Sample

size

Number of

dividend paying

firms

Average £Div per

dividend-paying

firm

Number of

repurchasing

firms

Average £SP

per

repurchasing

firm

£SP proportion

of total payout

(£SP+£DIV)

1994 879 775 14107 28 20306 0.05

1995 912 816 16811 33 60367 0.13

1996 894 792 19437 51 20196 0.06

1997 1068 774 18883 56 34441 0.12

1998 1123 818 28424 114 50998 0.20

1999 1047 743 24233 104 30437 0.15

2000 1047 682 32145 119 27324 0.13

2001 1094 646 33461 107 51813 0.20

2002 1090 609 34511 100 80899 0.28

2003 1000 572 39913 115 60104 0.23

2004 1031 574 49038 127 90003 0.29

2005 1084 572 56222 170 126450 0.40

2006 1109 538 70895 215 156987 0.47

2007 1105 531 71291 239 149713 0.49

2008 993 498 72727 251 75012 0.34

2009 913 421 93869 193 20947 0.09

2010 890 402 98560 185 25215 0.11

2011 865 423 111645 208 114268 0.33

2012 809 389 136193 190 89025 0.24

2013 699 310 145102 150 88281 0.23

42

0

500

1000

1500

2000

2500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 3:

Number of Sample/Dividend Paying/Repurchasing Firms by Year

NO. DIVIDEND PAYING FIRMS NO. SP FIRMS SAMPLE SIZE

0

50000

100000

150000

200000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 4:

Average Spent on Dividends/Repurchases by Dividend Paying/Repurchasing Firms by Year

AVG £DIV PER DIV FIRM AVG £SP PER SP FIRM

43

0

10000000

20000000

30000000

40000000

50000000

60000000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 5:

Aggregate £ Amount Spent on Dividends/Repurchases by Year

AGGREGATE £DIV AGGREGATE £SP

0

0.1

0.2

0.3

0.4

0.5

0.6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 6: Share Repurchase Amounts as a Proportion of Annual Aggregate Payout

44

Table 6: Correlations

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. DIVDUM 1.000

2. SPDUM 0.188 1.000

3. LDIVDUM 0.835 0.181 1.000

4. LSPDUM 0.169 0.508 0.186 1.000

5. SIZE 0.419 0.254 0.402 0.236 1.000

6. V/TA -0.144 -0.030 -0.166 -0.027 0.133 1.000

7. DTA/TA 0.089 -0.013 0.029 -0.020 0.166 0.064 1.000

8. E/TA 0.427 0.136 0.383 0.115 0.302 -0.220 0.484 1.000

9. RE/TA 0.387 0.121 0.379 0.113 0.270 -0.314 0.315 0.615 1.000

10. AGE 0.341 0.104 0.365 0.103 0.175 -0.177 -0.058 0.189 0.189 1.000

11. CASH/TA -0.304 -0.046 -0.316 -0.054 -0.112 0.373 -0.034 -0.287 -0.311 -0.223 1.000

12. LEV 0.129 0.211 0.138 0.218 0.330 -0.039 0.008 0.066 0.063 0.061 -0.088 1.000

13. REGIME2 -0.142 0.101 -0.142 0.081 0.000 0.015 0.036 -0.051 -0.047 -0.105 0.076 0.022 1.000

14. REGIME3 -0.126 0.109 -0.112 0.129 0.000 -0.019 -0.054 -0.034 -0.106 -0.015 0.031 0.096 -0.304 1.000

15. GGDP 0.130 -0.114 0.101 -0.147 0.000 0.081 0.087 0.073 0.063 0.053 -0.036 -0.067 -0.439 -0.144

(Variables are defined in Table 1.)

45

(Variables are defined in Table 1.)

Table 7: Determinants of Dividends and Share Repurchases

Model 1:

(Eq. 3)

DIVDUM = SIZE V/TA DTA/TA E/TA RE/TA AGE CASH/TA LEV

LDIVDUM SPDUM REGIME2 REGIME3 GGDP INDUSTRY

Model 2:

(Eq. 4)

SPDUM = SIZE V/TA DTA/TA E/TA RE/TA AGE CASH/TA LEV

LSPDUM DIVDUM REGIME2 REGIME3 GGDP INDUSTRY

Model 1: DIVDUM Model 2: SPDUM

Parameter

ML

Estimate

Wald

Chi 2 Pr > ChiSq

ML

Estimate

Wald

Chi2 Pr > ChiSq

Intercept -3.107 406.389 <.0001 -4.411 982.234 <.0001

SIZE 0.021 258.374 <.0001 0.014 154.990 <.0001

V/TA -0.078 9.640 0.002 -0.085 12.386 0.000

DTA/TA 0.307 7.538 0.006 -0.911 78.188 <.0001

E/TA 6.209 436.441 <.0001 2.049 57.156 <.0001

RE/TA 1.234 164.128 <.0001 0.302 21.251 <.0001

AGE 0.005 19.741 <.0001 0.001 3.268 0.071

CASH/TA -0.907 21.078 <.0001 0.870 26.043 <.0001

LEV -0.000 0.594 0.441 0.000 13.791 0.000

DIVDUM 0.530 51.132 <.0001

LDIVDUM 3.921 3682.618 <.0001

SPDUM 0.457 24.611 <.0001

LSPDUM 2.362 1891.976 <.0001

REGIME2 -0.537 45.753 <.0001 0.949 210.897 <.0001

REGIME3 -1.092 146.667 <.0001 0.920 160.794 <.0001

GGDP 0.127 42.362 <.0001 0.024 2.435 0.119

INDUSTRY DUMMIES YES YES

N 19,652 19,652

-2LOG L 8130 11068

p-value of LR <.0001 <.0001

% concordant 97.1 85.3

46

Table 8: Determinants of Amount Expended on Dividends and Share Repurchases

Model 1: log(£DIV)

Model 2: log(£SP)

Parameter t Value Pr > |t| Parameter t Value Pr > |t|

Estimate Estimate

Intercept -0.957 -13.56 <.0001 -0.875 -10.8 <.0001

SIZE 0.051 80.57 <.0001 0.014 18.6 <.0001

V/TA -0.066 -6.79 <.0001 0.001 0.08 0.934

DTA/TA -0.221 -4.52 <.0001 -0.559 -9.96 <.0001

E/TA 1.045 13.43 <.0001 0.602 6.67 <.0001

RE/TA -0.114 -8.11 <.0001 0.011 0.65 0.514

AGE 0.004 8.65 <.0001 0.001 2.43 0.015

CASH/TA -0.389 -4.59 <.0001 0.336 3.45 0.001

LEV 0.000 26.67 <.0001 0.000 24.88 <.0001

DIVDUM 0.292 6.5 <.0001

LDIVDUM 5.051 130.97 <.0001

SPDUM 0.600 13.45 <.0001

LSPDUM 3.412 64.52 <.0001

REGIME2 -0.149 -3.81 <.0001 0.710 15.89 <.0001

REGIME3 -0.301 -6.73 <.0001 0.607 11.77 <.0001

GGDP 0.073 7.41 <.0001 0.043 3.76 0.000

INDUSTRY DUMMIES YES YES

N 19,652 19,652

F-value 3327 472

p>F <.0001 <.0001

Adj. R2 0.7804 0.3349

(Variables are defined in Table 1.)

Model 1:

(Eq. 5)

Log(1+£DIV) = SIZE V/TA DTA/TA E/TA RE/TA AGE CASH/TA LEV

LDIVDUM SPDUM REGIME2 REGIME3 GGDP INDUSTRY

Model 2:

(Eq. 6)

Log(1+£SP) = SIZE V/TA DTA/TA E/TA RE/TA AGE CASH/TA LEV

LSPDUM DIVDUM REGIME2 REGIME3 GGDP INDUSTRY

47

Table 9: Multinomial Probit Regressions of Payout Type

Panel A: Base outcome = No Payout (PAYTYPE = 0)

PAYTYPE1: Dividend Only PAYTYPE2: Repurchase Only PAYTYPE3: Dividend plus Repurchase

Coef. z P>|z| Coef. z P>|z| Coef. z P>|z|

SIZE 0.015 15.01 0.000 0.014 9.04 0.000 0.023 18.62 0.000

V/TA -0.045 -2.32 0.020 -0.048 -1.92 0.055 -0.114 -3.01 0.003

DTA/TA 0.116 1.06 0.290 -0.425 -3.86 0.000 -0.501 -4.14 0.000

E/TA 3.291 6.39 0.000 1.102 4.61 0.000 4.962 8.09 0.000

RE/TA 0.843 10.43 0.000 0.296 4.32 0.000 0.776 7.35 0.000

AGE 0.003 4.28 0.000 0.003 2.85 0.004 0.004 4.54 0.000

CASH/TA -0.536 -3.75 0.000 0.604 3.79 0.000 0.038 0.20 0.844

LEV -0.000 -2.33 0.020 -0.000 -2.04 0.041 0.000 0.01 0.994

LDIVDUM 2.990 55.04 0.000 0.360 3.92 0.000 2.595 34.11 0.000

LSPDUM -0.263 -2.91 0.004 1.484 15.08 0.000 1.592 17.50 0.000

REGIME2 -0.440 -8.15 0.000 0.386 4.40 0.000 0.290 4.41 0.000

REGIME3 -0.844 -13.29 0.000 0.260 2.69 0.007 -0.075 -1.00 0.319

GGDP 0.083 5.87 0.000 0.025 1.40 0.161 0.096 5.99 0.000

CONSTANT -2.291 -22.03 0.000 -3.366 -17.64 0.000 -4.491 -29.65 0.000

INDUSTRY DUMMIES YES #CLUSTERS 2,689

LOG LIKELIHOOD -9692 *** N 19,652

48

Panel B: Base outcome = Dividend Only (PAYTYPE = 1)

Panel C: Base outcome =

Repurchase Only (PAYTYPE = 2)

PAYTYPE2:

Repurchase Only

PAYTYPE3:

Dividend plus Repurchase

PAYTYPE3:

Dividend plus Repurchase Coef. z P>|z| Coef. z P>|z| Coef. z P>|z|

SIZE -0.001 -0.51 0.610 0.008 7.43 0.000 0.009 4.87 0.000

V/TA -0.003 -0.11 0.916 -0.069 -2.15 0.032 -0.066 -1.60 0.109

DTA/TA -0.540 -3.88 0.000 -0.617 -5.84 0.000 -0.077 -0.53 0.596

E/TA -2.190 -4.16 0.000 1.671 3.12 0.002 3.860 6.37 0.000

RE/TA -0.547 -5.57 0.000 -0.067 -0.71 0.479 0.480 4.07 0.000

AGE 0.000 0.09 0.927 0.001 1.03 0.304 0.001 0.51 0.608

CASH/TA 1.140 5.97 0.000 0.574 3.35 0.001 -0.566 -2.45 0.014

LEV 0.000 0.17 0.862 0.000 3.64 0.000 0.000 2.73 0.006

LDIVDUM -2.630 -26.89 0.000 -0.394 -5.38 0.000 2.235 21.38 0.000

LSPDUM 1.748 17.88 0.000 1.855 34.41 0.000 0.107 1.15 0.251

REGIME2 0.826 9.10 0.000 0.730 14.35 0.000 -0.096 -0.97 0.331

REGIME3 1.104 11.06 0.000 0.769 12.35 0.000 -0.335 -3.11 0.002

GGDP -0.058 -3.09 0.002 0.013 1.02 0.308 0.071 3.62 0.000

CONSTANT -1.075 -5.56 0.000 -2.200 -15.56 0.000 -1.125 -5.17 0.000

(Variables are defined in Table 1.)