Financing Payouts

67 Pages Posted: 9 Dec 2014 Last revised: 28 Dec 2021

See all articles by Joan Farre-Mensa

Joan Farre-Mensa

University of Illinois at Chicago - Department of Finance

Roni Michaely

The University of Hong Kong; ECGI

Martin C. Schmalz

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

Date Written: December 27, 2021

Abstract

We find that over 40% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate share repurchases and dividends being externally financed, primarily with debt. Those firms persistently set payouts above free-cash-flow. In fact, 25% of payouts could not have been paid had firms not raised capital. Externally financed payouts are persistent, prevalent over our entire sample (1989-2019), and cannot be explained by payout-smoothing in response to volatile earnings or investment. The management of leverage is a key driver of payout-financing behavior, thus highlighting the close relationship between payout and capital structure decisions.

Keywords: Payout policy, financing decisions, debt issues, capital structure, cash management.

JEL Classification: G35; G32

Suggested Citation

Farre-Mensa, Joan and Michaely, Roni and Schmalz, Martin C. and Schmalz, Martin C., Financing Payouts (December 27, 2021). Ross School of Business Paper No. 1263, Available at SSRN: https://ssrn.com/abstract=2535675 or http://dx.doi.org/10.2139/ssrn.2535675

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

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

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

Martin C. Schmalz

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

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

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