The Relation Between Payouts and Profits Over the Last Four Decades

51 Pages Posted: 14 Jul 2021

See all articles by Henry Jarva

Henry Jarva

Hanken School of Economics

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance

Date Written: June 30, 2021

Abstract

This paper examines the changing relation between corporate payouts and profits over the last four decades. Relying on the clean surplus relation, we develop a piecewise regression model permitting a differential response between positive earnings (i.e. profits) and negative earnings (i.e. losses) to payouts. To motivate this asymmetry, we show that aggregate payouts of profits firms are about 17 times higher than aggregate payouts of loss firms. We provide evidence that the relation between payouts (and their component dividends and repurchases) and profits has significantly changed over the past decades. The observed upward trend is driven by large profitable firms that have good investment opportunities. We discuss possible explanations for this observed trend.

Keywords: Dividends, Earnings, Payout policy, Stock repurchases

JEL Classification: G32, G35, M41

Suggested Citation

Jarva, Henry and Rossi, Anna, The Relation Between Payouts and Profits Over the Last Four Decades (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=3877280 or http://dx.doi.org/10.2139/ssrn.3877280

Henry Jarva (Contact Author)

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland

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