Financing Payouts

Farre-Mensa, Joan; Michaely, Roni; Schmalz, Martin C.

doi:10.2139/ssrn.2535675

Financing Payouts

Ross School of Business Paper No. 1263

80 Pages Posted: 9 Dec 2014 Last revised: 22 Feb 2018

See all articles by Joan Farre-Mensa

Joan Farre-Mensa

Northeastern University, D'Amore-McKim School of Business

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)

Date Written: February 21, 2018

Abstract

We study the extent to which firms rely on the capital markets to fund their payouts. We find that 42% of firms that pay out capital also initiate debt or equity issues in the same year, resulting in 32% of aggregate payouts being externally financed. Most firms that simultaneously raise and distribute capital do not generate enough free cash flow to fund their payouts internally. Firms devote more external capital to finance share repurchases than to avoid dividend cuts. Payouts financed by debt, which allow firms to jointly manage their capital structure and liquidity, are by far the most common.

Keywords: payout policy, financing decisions, debt issues, equity issues, capital structure

JEL Classification: G35; G32

Suggested Citation: Suggested Citation

Farre-Mensa, Joan and Michaely, Roni and Schmalz, Martin C., Financing Payouts (February 21, 2018). Ross School of Business Paper No. 1263. Available at SSRN: https://ssrn.com/abstract=2535675 or http://dx.doi.org/10.2139/ssrn.2535675