January 22, 2003
From the desk of Jane Galt:Another correspondant forwards this article and asks whether there's anything to it. Apparently, some are arguing that executives at companies whose stock pays dividends are less likely to dump their stock.
Well, it makes intuitive sense, largely because executives with large stock holdings in dividend-paying company stock are less likely to need to dump their stock. Non-dividend paying stocks enrich their holders through appreciation in the stock price -- the perfectly innocent executive who merely wants some cash to buy a house, or diversify his portfolio, has to sell company stock to get it.
It would also, I think, reduce the incentive to dump, because it's harder for the executive to generate a big run up in the stock price; dividend-paying stocks are generally less volatile for a number of reasons.
But it's hardly definitive proof. For one thing, you have to remember that dividend-paying stocks are very different kinds of companies, from non-payers. And for another, a company in trouble may have stopped paying dividends before the executives dumped. Nonetheless, an interesting read.
Posted by Jane Galt at January 22, 2003 1:32 PM | TrackBack | Technorati inbound links"); ?>This is pretty intriguing. The whole reason for a company *not* paying dividends (when it can afford to) is of course that the management feels they can generate higher returns through internal reinvestment. But this data implies that executives who place a higher long-term value on their stock (by not selling it)are also those who believe that shareholders (including themselves) can get better returns by having the money paid out as dividends than by reinvesting it in the company in which they believe so strongly.
Posted by: David Foster on January 22, 2003 5:53 PMSo in other words, self-interest again trumps all for producing maximum efficiency?
Posted by: anony-mouse on January 22, 2003 10:00 PMI think there is more to what Jane says about dividend-paying companies being different kinds of companies - more mature, stable companies.
Posted by: Robin Roberts on January 22, 2003 11:19 PMEconomics works at the margins. It is true that divident-paying companies are different. Theory suggests that companies that have an obvious growth path will not pay dividends - they will instead grow, betting that the wealth created for stockholders is greater than paying dividends. On the other hand, companies which currently cannot reasonably grow will pay dividends. These tend to be large, established companies which have locked up a nice market. (RJR Nabisco -- mmm, cookies.) But this route is penalized by double-taxation of profits, so it is not that common any more.
In between the two types of companies, there are the marginal companies. These companies are relatively indifferent between paying dividents (taxed at 60% or so) and growing (paying only capital gains). Since the capital gains tax is low, what this means is that these companies are not very sanguine about their ability to manage growth successfully, but the near-punitive taxation on dividends means they might try it anyway. (Not a good investment, but taxes induce people to do funny things.) Anyway, it is these companies that will change policy if Bush gets his way; they will all begin to pay dividends.
So this will move a bunch of companies between the clearly growing ones, and the old sedate ones, into the dividend-paying category. Old, sedate companies do not tend to have very volatile stock; this is probably the biggest cause for the dividend-non-dumping association. Moving marginal companies into the fold will reduce the association, but not eliminate it.
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