Corporate Payout Policy

Abstract

We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies - i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors' behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.

1 Introduction 2 Basic Theory: The Need to Distribute Free Cash Flow is Foundational 3 Security Valuation Problems, Agency Costs, and Optimal Payout Policy 4 Corporate Payouts: Scale, Concentration, and Earnings Linkage 5 Payouts and Earnings: A Closer Look 6 Are Dividends Disappearing' 7 Why Do Dividends Survive' 8 Signaling and the Information Content of Dividends 9 Behavioral Influences on Payout Policy 10 Clientele Effects: Transaction Costs, Institutional Ownership, and Payout Policy 11 Controlling Stockholders and Payout Policy 12 Taxes and Payout Policy 13 The Advantages of Stock Repurchases 14 Conclusion: What We Know About Payout Policy and Promising Avenues for Future Research

Keywords: payout policy, dividends, stock repurchase

JEL Classification: G32, G32