Do Capital Structure Models Square with the Dynamics of Payout?

49 Pages Posted: 3 Jun 2021

See all articles by Shiqi Chen

Shiqi Chen

University of Cambridge - Judge Business School

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 26, 2021

Abstract

We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing. Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.

Keywords: payout smoothing, capital structure, pecking order model, leverage target, investment

JEL Classification: G35, G32, G11

Suggested Citation

Chen, Shiqi and Lambrecht, Bart, Do Capital Structure Models Square with the Dynamics of Payout? (May 26, 2021). Available at SSRN: https://ssrn.com/abstract=3854109 or http://dx.doi.org/10.2139/ssrn.3854109

Shiqi Chen (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Bart Lambrecht

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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