The relation between payouts and profits over time

This paper examines the evolving relationship between corporate payouts and profits using annual Compustat data for U.S. industrial firms from 1980 to 2022. Grounded in the clean surplus relation, the analysis employs a piecewise regression model that accounts for asymmetric responses to profits and losses and incorporates contemporaneous, past, and future profits. The results show that the sensitivity of payouts (dividends and share repurchases) to profits has increased substantially over time, with past profits the strongest predictor. Current profits remain important, while future profits play a modest role. Including loss observations significantly attenuates the estimated sensitivity to earnings, and payouts are largely unresponsive to losses. A negative association between payouts and future profits in the early part of the sample supports the free cash flow view that distributions reflect limited investment opportunities, but this pattern reverses in later decades. The increasing sensitivity of payouts to profits is most pronounced among larger firms and those with high Tobin’s Q. These findings provide new evidence on the shifting drivers of shareholder distributions and suggest a growing reliance on profitability in payout decisions.