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My thought was that during the period you cover, the cost of capital has presumably dropped significantly as improvements in our financial structure/institutions have reduced risk. When I think of substitutes to equity, I think of bonds or bank financing.
So, the model I have in mind is something like total cost of equity financing (which I guess you'd figure out with a combination of P/E and dividend rates) versus total cost of debt financing. Do they follow a similar path over time?
Now, this could all be a silly exercise as equity and bond markets didn't have the benefit of modern financial pricing theory back then and certainly were more subject to variations in credit booms and busts, but the first question when I read your article was "hmm, was that a systemic thing in terms of the overall riskiness and hence price of capital over time, or is there something else going on?" If it is systemic, then price/yield of alternative sources of capital would show the same thing, as well as vindicate the story that as our financial system has developed, it has reduced risk.
Then there's the question of was the investment riskier in 1900s or has our financial/accounting/regulatory system just improved information. Or were the robber barons just setting the dividends as their way to get paid (i.e., changes in corporate governance). Lots of possible stories, including classical political economy.
This could all be stuff just relevant to academics and not so relevant to your readers, but sometimes coming up with new ideas is difficult, and I very much enjoy your blog and wanted to try to give back a bit.
My explanation for the decline in dividends is based on demographics and tax innovation traceable to the early 1980s. The Boomers were just entering their higher income years and the 401(k) plan was introduced in 1980. The following year the Economic Recovery Tax Act permitted all employees, in addition to those not covered by an employee retirement plan, to contribute to an IRA. The result was the massive growth of a new investor class with a limited understanding of markets and risk. The bulge of Boomers became a windfall for Wall Street (the oldest having just turned 35 in 1981).
The popularity of tax-deferred savings vehicles reduced the appeal of dividend income. The goal of retirement savings is total return — to grow the nest egg. Thus, the distinction between dividend yield and price appreciation quickly lost relevance. New companies saw little need to pay dividends. Many existing companies reduced their dividends and redirected those earnings to corporate growth (not to mention executive compensation).
Perhaps dividends will someday reemerge as a mainstay of investing. The one certainty is this: it won't happen overnight. But if the flight from equities in 2008 and early 2009 resumes, publicly traded companies may eventually rediscover the power of dividends to coax a risk-adverse generation back to the markets.
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