A Lintner Model of Payout and Managerial Rents
Bart M. Lambrecht
University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)
Stewart C. Myers
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
July 5, 2011
Journal of Finance, Forthcoming
AFA 2011 Denver Meetings Paper
We develop a dynamic agency model where payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout in order to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target-adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.
Number of Pages in PDF File: 61
Keywords: payout, investment, financing policy, agency
JEL Classification: G31, G32
Date posted: March 16, 2010 ; Last revised: January 16, 2012
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