Why Companies Pay No Dividens
When considering dividend policy, corporate policymakers are influenced by many factors. These considerations include the company's goals and situational factors such as current and anticipated future earnings, reinvestment opportunities, and cash availability. Lauenstein  notes, however, that the dominant considerations in most discussions of dividend policy have been the immediate effect on stock price and conformity with convention. For example, some executives and directors judge that dividends should fall within a conventional range of 20 to 50 percent of earnings, while others feel constrained to follow the current practice in their particular industry.
In addition, recent survey research by Farrelly, Baker and Edelman  shows that corporate policymakers are reluctant to see dividends fluctuate widely. Dividends have become so "automatic" that the possibility of omitting or reducing them may not even be considered by many companies. Consequently, corporate policymakers may commit serious strategic errors by adopting payout policies that bear little or no relationship to shareholders' long-term economic interests. Firms may experience adverse effects of altering investment and capital structure policies in an attempt to sustain an inappropriate dividend payout.
Corporations follow many different dividend payout schemes. Most companies follow a stable dividend policy, but a few adopt a constant payout ratio or low regular dividends plus extras. Some companies continually increase their cash dividends each year, sometimes at a rate higher than inflation. Still others pay no cash dividends.
This broad array of dividend policies suggests that there are many views among practitioners regarding the appropriate dividend policy for their firms. Lauenstein  demonstrates in his simulation model of optimum dividend payout rates that the best dividend policy for shareholders depends on the corporate situation such as the pre-tax return on assets, sales growth rate, and corporate tax rate. Thus, the importance attached to various determinants of dividend policy is likely to differ among firms.
The motives underlying several of these payout schemes have been investigated in prior survey research. Baker, Farrelly, and Edelman  and Farrelly, Baker and Edelman  examined companies with "normal" kinds of dividend policies and excluded unusual cases. Based on their analysis of utility, manufacturing, and wholesale/retail firms, they concluded that the major determinants of dividend payments appear to be similar to those in Lintner's behavioral model .1 In particular, managers indicated that they were highly concerned with dividend continuity and believed that dividend policy affects share value. Baker and Farrelly  reported similar results for dividend achievers, which they defined as companies having an unbroken record of at least ten consecutive years of dividend increases.
Although prior studies have contributed to our understanding of corporate dividends from the viewpoint of policymakers, they have not investigated why some companies do not pay cash dividends. The current study extends the growing body of behavioral studies that provide "micro" investigations of dividend behavior by focusing on how managers of a particular subgroup of firms make dividend policy decisions. Specifically, this study examines the behavior of a sample of New York Stock Exchange (NYSE) firms with a long-standing policy of paying no cash dividends. The importance of this study is twofold: its ability to explain managements' rationale for a specific dividend scheme, namely, paying no cash dividends; and its comparison of how financial executives employing different dividend schemes value the various determinants affecting dividend policy.
The remainder of the paper is organized as follows. The first section presents two scenarios that may explain why some companies do not pay cash dividends. …