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Corporate Payout Policy

Foundations and Trends in Finance, Vol. 3, Nos. 2-3, pp. 95-287, 2008

198 Pages Posted: 7 May 2009 Last revised: 29 Dec 2012

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Douglas J. Skinner

The University of Chicago - Booth School of Business

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Date Written: May 7, 2009

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

Suggested Citation

DeAngelo, Harry and DeAngelo, Linda and Skinner, Douglas J., Corporate Payout Policy (May 7, 2009). Foundations and Trends in Finance, Vol. 3, Nos. 2-3, pp. 95-287, 2008. Available at SSRN: https://ssrn.com/abstract=1400682

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-3868 (Phone)
213-740-6650 (Fax)

Douglas J. Skinner

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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