Canadian corporate payout policy

The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings.

The study uses logistic regressions to examine the likelihood of paying dividends and the timing of repurchases and OLS regressions to examine the level of payout.

The fraction of dividend‐paying firms declines from 1988 to 2001 and then slightly rebounds until the end of the sample period in 2006. Firm size, profitability, investment opportunities, and catering incentives explain the likelihood of paying dividends. Unlike US firms, Canadian repurchase‐only firms do not become important payers in terms of either the percentage of firms or the level of payout. Dividend‐only firms pay out significant amounts of cash. Firms with both regular dividends and regular repurchases pay out the largest amount. The payout of different groups of payers is determined by their earnings. Testing firms with both regular dividends and regular repurchases reveals that earnings, undervaluation, and availability of cash explains the timing of repurchases but earnings mainly explains the level of repurchases.

Canadian data are unavailable after 2006, which precludes investigating the potential implications of the financial crisis beginning in 2007.

This is the first paper to analyze the evolution of the relationship between payout and earnings in Canada.