Payout Policy Pedagogy: What Matters and Why

DeAngelo, Harry; DeAngelo, Linda

doi:10.2139/ssrn.890616

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Payout Policy Pedagogy: What Matters and Why

26 Pages Posted: 16 Mar 2006 Last revised: 14 Feb 2023

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: August 1, 2006

Abstract

This paper argues that we should abandon MM (1961) irrelevance as the foundation for teaching payout policy, and instead emphasize the need to distribute the full value generated by investment policy ("full payout"). Because MM's assumptions restrict payouts to an optimum, their irrelevance theorem does not provide the appropriate prescription for managerial behavior. A simple example clarifies why the correct prescription is "full payout," and why both payout and investment policy matter even absent agency costs (DeAngelo and DeAngelo (2006)). A simple life-cycle generalization explains the main stylized facts about the payout policies of U.S. and European firms.

Keywords: Payout policy, dividends, capital budgeting, corporate finance

JEL Classification: G35, G31

Suggested Citation: Suggested Citation

DeAngelo, Harry and DeAngelo, Linda, Payout Policy Pedagogy: What Matters and Why (August 1, 2006). Available at SSRN: https://ssrn.com/abstract=890616 or http://dx.doi.org/10.2139/ssrn.890616