Corporate Payout Policy
197 Pages Posted: 24 Jun 2010
Date Written: 2008
We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner  and Miller and Modigliani . We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen ) and security valuation problems (as in Myers and Majluf ) does a good job 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.
Contents: 1) Introduction. 2) Basic theory: The need to distribute FCF 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 areas for future research. Appendix: Microsoft’s dividend and stock buyback plans. References.
Keywords: corporate payout policy, dividends, stock repurchases
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