Financing Payouts

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