Harvard Business School
Johnson@Cornell Tech, Cornell University; Interdisciplinary Center (IDC)
Martin C. Schmalz
University of Michigan, Stephen M. Ross School of Business
February 24, 2014
Ross School of Business Paper No. 1227
We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts are made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management.
Number of Pages in PDF File: 119
Keywords: Payout Policy; Survey; Dividends; Share Repurchases
JEL Classification: G35
Date posted: February 25, 2014 ; Last revised: March 20, 2014
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