ABSTRACT

In a recent study, Fama and French (2001) showed that over the last twenty or so years a large number of companies have stopped paying dividends to their common stockholders’. Specifically, in 1978, 66.5 percent of publicly-traded firms paid dividends but by 1999 only 20.8 percent of such firms paid dividends. In analyzing their data, Fama and French conclude that part of the reason for the declining dividend payments has been a general reduction in the propensity of firms to pay dividends. One possible explanation for this reduction in the propensity to pay is that firms have decided to rely more on internally-generated funds to finance their investment opportunities than they have in the past. Formally, this is the “pecking order theory” of firm capital structure suggested by Myers (1984) and Myers and Majluf (1984). Assuming the “pecking order theory” is the correct explanation of the dividend reductions firms will, among other things, also be using less debt capital to finance their investments than they have in the past. Fosberg and Ghosh (2005) tested this theory on a large sample of NYSE and NASDAQ firms and found that there had been a significant reduction in the amount of debt in the capital structures of NASDAQ firms over the last twenty years. NYSE firms did not exhibit any noticeable changes in capital structure over the period. At this point it is unclear if this difference in capital structure changes is due to firm size, exchange listing, or some other factor. Additionally, Fosberg and Ghosh found that there is a significant inverse relationship between firm profitability and the amount of debt in the firm’s capital structure for NYSE firms, but not for NASDAQ firms.