Cost Structure and Payout Policy

Abstract

I investigate the effects of firms’ proportion of fixed and variable costs on their payout policy. The investigation finds that firms with higher fixed costs pay a lower fraction of their operating income in dividends and share repurchases. Further, these firms return a higher fraction of their payout via share repurchases because this method offers greater flexibility. These firms also have significantly higher volatility in their future cash flows and more variable future operating incomes. The results are robust to several alternate specifications and firm-level controls and show that the firms’ cost structure plays a significant role in payout policy choices.

Keywords: Payout; Cost Structure, Repurchases; Operating Leverage; Fixed Cost

JEL Classification: G35