Payout Policy

119 Pages Posted: 25 Feb 2014 Last revised: 19 Nov 2016

Joan Farre-Mensa

Cornerstone Research

Roni Michaely

Cornell University - Cornell Tech NYC

Martin C. Schmalz

University of Michigan, Stephen M. Ross School of Business; CEPR; CESifo; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: February 24, 2014


We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts are made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management.

Keywords: Payout Policy; Survey; Dividends; Share Repurchases

JEL Classification: G35

Suggested Citation

Farre-Mensa, Joan and Michaely, Roni and Schmalz, Martin C., Payout Policy (February 24, 2014). Ross School of Business Paper No. 1227. Available at SSRN: or

Joan Farre-Mensa (Contact Author)

Cornerstone Research ( email )

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Roni Michaely

Cornell University - Cornell Tech NYC ( email )

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Martin C. Schmalz

University of Michigan, Stephen M. Ross School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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