Payout Policy

Posted: 25 Nov 2014

See all articles by Joan Farre-Mensa

Joan Farre-Mensa

University of Illinois at Chicago - Department of Finance

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Martin C. Schmalz

University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2014


We survey the literature on payout policy, with a particular emphasis on developments in the past two decades. The cross-sectional empirical evidence for the traditional motivations behind firms paying out (agency, signaling, and taxes) is most persuasive with regard to 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 have been made over the past 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motivations, 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 motivations. 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.

Suggested Citation

Farre-Mensa, Joan and Michaely, Roni and Schmalz, Martin C., Payout Policy (December 2014). Annual Review of Financial Economics, Vol. 6, pp. 75-134, 2014. Available at SSRN: or

Joan Farre-Mensa (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Martin C. Schmalz

University of Oxford - Finance ( email )

United States

CEPR ( email )

United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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