Risk Shifting Performance of Royalty Contracts; Airbus' Launch Aid is Better Still than Equity
Lancaster University - Department of Economics
September 20, 2005
The simple cash flow definition of profit, i.e. the pass-through dividend payout policy, is a standard workhorse of economic analysis. Nevertheless it is well established that firms smooth their dividend payouts and generally resort to dividend cuts only as a last resort. Thus far these empirically observed Lintner-style smoothed dividend equity shares have been omitted from analyses of risk shifting performance. This paper augments Sebenius and Stan's (1982) analysis of risk shifting performance with the empirically relevant category of smoothed dividend equity shares. Compared to the royalty vs. pass-through profit contrast, the revenue-cost covariance threshold at which it becomes risk-efficient to pay a royalty share (rather than a smoothed dividend) occurs at a lower, not necessarily positive level. This result provides further grounds for understanding the effect of royalty-based contracts throughout the economy, including European 'Launch Aid' for Airbus.
Number of Pages in PDF File: 25
Keywords: Risk shifting, empirical dividend policies, royalty contracts, Launch Aid, civil aerospace
JEL Classification: D89, F13, G35, H81, L14, L93, O38
Date posted: October 21, 2004