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Payout Policy

Author

Listed:
  • Joan Farre-Mensa

    () (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Roni Michaely

    () (Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
    Interdisciplinary Center (IDC) Herzliya, Herzliya 46150, Israel)

  • Martin Schmalz

    () (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

We survey the literature on payout policy, with a particular emphasis on developments in the past two decades. The cross-sectional empirical evidence for the traditional motivations behind firms paying out (agency, signaling, and taxes) is most persuasive with regard to agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts have been made over the past 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motivations, such as changes in compensation practices and management incentives, are better able to explain the observed variation in payout patterns over time than the traditional motivations. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management.

Suggested Citation

  • Joan Farre-Mensa & Roni Michaely & Martin Schmalz, 2014. "Payout Policy," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 75-134, December.
  • Handle: RePEc:anr:refeco:v:6:y:2014:p:75-134
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110613-034259
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    Other versions of this item:

    • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.

    More about this item

    Keywords

    payout policy; dividends; repurchases;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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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