Do Firms Consider Economic Outlook When Determining Payout Policy?

26 Pages Posted: 1 Dec 2020

See all articles by Benjamin Anderson

Benjamin Anderson

San Jose State University

Matthew Faulkner

San Jose State University

Date Written: September 1, 2020

Abstract

Payout policy is one of the most important policies set by firms and represents a major use of capital by publicly traded corporations. Firms should consider future economic activity and future firm performance when determining payout policy choices, given they are cash outflow commitments from the firm. We empirically examine whether firms use economic outlook when determining payout policy using publicly available data from the Chicago Federal Reserve Bank and Compustat. We find that economic outlook is positively related to firm payout policy. Specifically, we find that firms are more likely to pay out cash dividends and repurchase shares when economic outlook is positive. Furthermore, when examining only firms already paying dividends and/or repurchasing shares, firms pay greater amounts of cash dividends and repurchase more shares when economic outlook is positive. We are the first, to our knowledge, to examine whether firms use economic outlook to determine their payout policy. Our paper motivates future research in corporate finance to examine how firms use economic outlook when making capital planning decisions.

Keywords: payout policy, dividends, economic outlook, NAICS, corporate finance, macroeconomic activity

JEL Classification: G35, E32, G30

Suggested Citation

Anderson, Benjamin and Faulkner, Matthew, Do Firms Consider Economic Outlook When Determining Payout Policy? (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3707236 or http://dx.doi.org/10.2139/ssrn.3707236

Benjamin Anderson (Contact Author)

San Jose State University ( email )

United States

Matthew Faulkner

San Jose State University ( email )

United States

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