Financing Payouts

81 Pages Posted: 9 Dec 2014 Last revised: 2 Sep 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: September 1, 2021

Abstract

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. Most externally financed payouts are the result of firms persistently setting payouts above free cash flow. The management of leverage and cash for tax optimization purposes is a key—but not the only—driver of payout-financing behavior. Debt-financed payouts are associated with increased firm financial fragility during the COVID-19 and other crises—but internally funded payouts are not. Our results highlight the need to view payout policy through the wider lens of capital structure.

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 (September 1, 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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