Payout Policy and Cash-Flow Uncertainty

Abstract

The importance of cash-flow uncertainty in payout policy has received little attention in empirical studies, while survey studies such as Linter (1956) and Brav, Graham, Harvey and Michaely (2005) indicate its importance. We conduct comprehensive analysis of its importance in payout policy. With worldwide firm-level data, we present evidence that cash-flow uncertainty is an important cross-sectional determinant of corporate payout policy. Our results show that, across countries, cash-flow uncertainty (represented by stock return volatility) is a key factor that affects the amount of dividends as well as the probability of paying dividends. The impact of cash-flow uncertainty on dividends is generally stronger than the impact of other potential determinants of payout policy - such as the earned/contributed capital mix, agency conflicts, investment opportunities, firm size, and profitability. Furthermore, cash-flow uncertainty also has a significant impact on the amount of total payouts (i.e., the sum of dividends and repurchases).

Keywords: cash-flow uncertainty, dividends, repurchases

JEL Classification: G32, G35