Dividend and Payout Policy
Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
- Chair: Gustavo Grullon, Rice University
What's Behind the Smooth Dividends? Evidence From Structural Estimation
AbstractI 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
AbstractThis 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 />
AbstractWe 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.
- G3 - Corporate Finance and Governance