Excess Corporate Payouts and Financial Distress Risk
53 Pages Posted: 8 Feb 2016 Last revised: 17 Jan 2019
Date Written: January 16, 2019
Firms that follow excessive payout policies (over-payers) are higher on the financial distress spectrum and have lower survival rates than under-payers. In addition, over-payers endure lower future sales and asset growth than under-payers. Exogenous import tariff reductions, which increase product market competition and impact negatively on cash flows, reduce the likelihood of overpayment. We interpret this as evidence consistent with a financial flexibility channel explaining the relation between excessive payouts and financial distress, rather than a risk-shifting mechanism. Our finding of a positive association between excessive payouts and financial distress risk is robust to using different definitions of overpayment and financial distress, various empirical specifications and tests mitigating the impact of confounding effects.
Keywords: payout policy, financial distress, firm survival, institutional investor, over-payers, corporate governance
JEL Classification: G32, G33, G35
Suggested Citation: Suggested Citation