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Do Capital Structure Models Square with the Dynamics of Payout?

Author

Listed:
  • Shiqi Chen

    (Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom)

  • Bart M. Lambrecht

    (Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom)

Abstract

We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward the NDR target facilitates payout smoothing. Under strict pecking-order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.

Suggested Citation

  • Shiqi Chen & Bart M. Lambrecht, 2021. "Do Capital Structure Models Square with the Dynamics of Payout?," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 271-299, November.
    • Handle: RePEc:anr:refeco:v:13:y:2021:p:271-299
    DOI: 10.1146/annurev-financial-010421-085556
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    More about this item

    Keywords

    payout smoothing; capital structure; pecking-order model; leverage target; investment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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