The Flexibility of Corporate Payouts Vis-a-Vis Capital Investment: Some UK Evidence

International Journal of Managerial Finance, ISSN: 1743-9132, Publication date: 2 February 2021, https://doi.org/10.1108/IJMF-10-2020-0516

Posted: 10 Mar 2021

See all articles by Ioannis Chasiotis

Ioannis Chasiotis

affiliation not provided to SSRN

Andreas G. Georgantopoulos

National and Kapodistrian University of Athens; Panteion University of Athens - Panteion University of Political and Social Sciences

Date Written: February 2, 2021

Abstract

Purpose
This study investigates the relative flexibility of payouts vis-à-vis investment in the UK, motivated by concerns regarding this market's distinct payout characteristics and limited relevant research. It addresses the information gap related to the use of conditional mean estimations and examines firm behavior across the investment distribution.

Design/methodology/approach
The sample is an unbalanced panel of 6,173 firm-year observations, from 271 non-financial firms in the FTSE-All Share Index, during 1990–2019. Estimation methods include pooled- ordinary least squares (OLS) and firm fixed-effects regressions as well as unconditional quantile regressions with firm fixed effects.

Findings
For the “average” firm results show a negative relationship between share repurchases and investment, amplified in the presence of financial constraints and growth opportunities. Quantile regressions analysis reveals heterogeneous firm behavior as this relationship becomes stronger in successive quantiles of the investment distribution and disappears at the upper/lower extremes. Results suggest that UK firms exploit the inherent flexibility of share repurchases to facilitate investment. However, this flexibility appears irrelevant to firms with extremely high/low investment, characterized by significant differences in growth opportunities, cash flows and external financing cost. Dividends and investment are independent across the investment distribution, underlining the rigidity of dividends in the UK.

Originality/value
To the best of our knowledge, this is the first study to investigate the relative flexibility of payouts vis-à-vis investment in the UK, using firm-level financial data and at points other than the conditional mean. Its value lies in that it shows that share repurchases facilitate rather than impede investment and thus do not corroborate relevant concerns by economists and policymakers. Additionally, by utilizing a relatively new methodology it uncovered heterogeneous firm behavior across the investment distribution suggesting that conditional mean estimations should be applied with caution at least for highly heterogeneous samples.

Keywords: s United Kingdom, Financial constraints, Capital investment, Financial flexibility, Corporate payout policy

Suggested Citation

Chasiotis, Ioannis and Georgantopoulos, Andreas G., The Flexibility of Corporate Payouts Vis-a-Vis Capital Investment: Some UK Evidence (February 2, 2021). International Journal of Managerial Finance, ISSN: 1743-9132, Publication date: 2 February 2021, https://doi.org/10.1108/IJMF-10-2020-0516, Available at SSRN: https://ssrn.com/abstract=3791452

Ioannis Chasiotis

affiliation not provided to SSRN

Andreas G. Georgantopoulos (Contact Author)

National and Kapodistrian University of Athens ( email )

Greece

Panteion University of Athens - Panteion University of Political and Social Sciences ( email )

136 Sygrou
Athens
Greece

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