A Litner Model of Payout and Managerial Rents

62 Pages Posted: 26 Jul 2010

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2010

Abstract

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.

Suggested Citation

Lambrecht, Bart and Myers, Stewart C., A Litner Model of Payout and Managerial Rents (July 2010). NBER Working Paper No. w16210. Available at SSRN: https://ssrn.com/abstract=1648010

Bart Lambrecht (Contact Author)

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Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

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