61 Pages Posted: 16 Mar 2010 Last revised: 16 Jan 2012
Date Written: July 5, 2011
We develop a dynamic agency model where payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout in order to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target-adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.
Keywords: payout, investment, financing policy, agency
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
Lambrecht, Bart M. and Myers, Stewart C., A Lintner Model of Payout and Managerial Rents (July 5, 2011). Journal of Finance, Forthcoming; AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1571081 or http://dx.doi.org/10.2139/ssrn.1571081
By Ivo Welch