Production-Based Payout Policies

Abstract

We test if the neoclassical q-theory of investment jointly explains the cross-section of average dividend yields and stock returns. Abstracting from financial market frictions, our structural estimations emphasize the overlooked role of investment policies, real frictions, and capital adjustment costs in explaining firm-level payout policies. Incorporating intangible capital as a second capital input factor and accounting for total distributions to shareholders in the form of share buybacks are critical to the success of the model. Overall, capital investments, stock prices, and corporate payouts are closely tied together.

Keywords: asset pricing, q-theory, intangible capital, real frictions, payout yield

JEL Classification: D25, E22, E44, G11, G12, G31