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Payout Policy Pedagogy: What Matters and WhyHarry DeAngeloUniversity of Southern California - Marshall School of Business - Finance and Business Economics Department Linda DeAngeloUniversity of Southern California - Marshall School of Business - Finance and Business Economics Department European Financial Management, Vol. 13, No. 1, pp. 11-27, January 2007 Abstract: This paper argues that we should abandon MM (1961) irrelevance as the foundation for teaching payout policy, and instead emphasise the need to distribute the full value generated by investment policy ("full payout"). Because MM's assumptions restrict payouts to an optimum, their irrelevance theorem does not provide the appropriate prescription for managerial behaviour. A simple example clarifies why the correct prescription is "full payout," and why both payout and investment policy matter even absent agency costs (DeAngelo and DeAngelo, 2006). A simple life-cycle generalisation explains the main stylised facts about the payout policies of US and European firms.
Number of Pages in PDF File: 17 Accepted Paper SeriesDate posted: January 8, 2007Suggested CitationContact Information
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