Payout Policy Pedagogy: What Matters and Why

17 Pages Posted: 8 Jan 2007

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

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Abstract

This paper argues that we should abandon MM (1961) irrelevance as the foundation for teaching payout policy, and instead emphasise 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 behaviour. 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 generalisation explains the main stylised facts about the payout policies of US and European firms.

Suggested Citation

DeAngelo, Harry and DeAngelo, Linda, Payout Policy Pedagogy: What Matters and Why. European Financial Management, Vol. 13, No. 1, pp. 11-27, January 2007. Available at SSRN: https://ssrn.com/abstract=955552 or http://dx.doi.org/10.1111/j.1468-036X.2006.00283.x

Harry DeAngelo (Contact Author)

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

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Linda DeAngelo

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

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-3868 (Phone)
213-740-6650 (Fax)

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