Dividend and Payout Policy

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Chicago Ballroom X
Hosted By: American Finance Association
  • Chair: Gustavo Grullon, Rice University

The Effect of Option-Based Compensation on Payout Policy: Evidence From FAS 123R

Nan Li
,
Columbia University
Fabrizio Ferri
,
Columbia University

Abstract

Does option-based compensation have a causal influence on payout policy? To address this question we examine the adoption of mandatory expensing of stock options (via accounting standard FAS123R), a plausible exogenous shock to the use of option-based compensation. As FAS123R applies to all firms, our identification strategy exploits the fact that the reduction in option-based compensation in response to the accounting standard varies with the firm-specific expected accounting impact, as measured by the option expense disclosed in the footnotes prior to FAS123R. Using a difference-in-difference research design we do not find that (accounting-driven) reductions in option-based pay cause dividends to increase, repurchases to decrease or the payout composition to change, except for some increase in dividends among dividend-paying small firms. Our results contrast with the widely held belief that option-based pay has a significant causal influence on payout policy and cast doubts on its role in the shift from dividends to repurchases in recent decades.

What's Behind the Smooth Dividends? Evidence From Structural Estimation

Yufeng Wu
,
University of Illinois-Urbana-Champaign

Abstract

I find that dividends are a strong predictor of forced managerial turnover, which suggests that managers' career concerns can be an important force behind observed dividend smoothness. I study the effect of this channel by developing a dynamic agency model in which dividends signal the firms' earnings persistence. In equilibrium, managers treat dividends and earnings as informational substitutes, and they smooth dividends relative to earnings to smooth negative news releases and lower their turnover risk. Empirical estimates of the model parameters imply that 38% of observed dividend smoothness is turnover-induced. Having a turnover risk leads managers to smooth dividends excessively, compared to the level that maximizes the shareholders' wealth. In order to accommodate this excess dividend smoothing, managers cut investments and adjust external financing policies. These effects destroy firm value by 2.84%.

Shareholder-Creditor Conflict and Payout Policy: Evidence From Mergers Between Lenders and Shareholders

Yongqiang Chu
,
University of South Carolina

Abstract

This paper studies how the conflict of interest between shareholders and creditors affects corporate payout policy. Using mergers between lenders and equity holders of the same firm as an exogenous shock to the conflict between shareholders and creditors, I show that firms pay out less when there is less conflict between shareholders and creditors, suggesting that shareholder-creditor conflict may induce firms to pay out more at the expense of creditors. I also find that the effect is stronger for firms in financial distress.<br />

Financing Payouts

Joan Farre-Mensa
,
Harvard Business School
Roni Michaely
,
Cornell University
Martin Schmalz
,
University of Michigan

Abstract

We study the extent to which firms rely on the capital markets to fund their payouts. We find that 42% of firms that pay out capital also initiate debt or equity issues in the same year, resulting in 32% of aggregate payouts being externally financed. Most firms with simultaneous payouts and security issues do not generate enough operating cash flow to fund both their investment and payouts without the proceeds of these issues. Firms devote more external capital to finance their share repurchases than to avoid regular dividend cuts. Debt is the main source of capital used to externally finance payouts, particularly when credit market conditions are favorable. Firms’ desire to jointly manage their capital structure and liquidity policies—for tax or agency reasons—appears to be a key driver of their decision to simultaneously raise and pay out capital.
Discussant(s)
David De Angelis
,
Rice University
Oliver Levine
,
University of Wisconsin-Madison
Alan Crane
,
Rice University
Gerard Hoberg
,
University of Southern California
JEL Classifications
  • G3 - Corporate Finance and Governance