IDEAS home Printed from https://ideas.repec.org/h/eee/finchp/1-07.html
   My bibliography  Save this book chapter

Payout policy

In: Handbook of the Economics of Finance

Author

Listed:
  • Allen, Franklin
  • Michaely, Roni

Abstract

This paper surveys the literature on payout policy. We start out by discussing several stylized facts that are important to the development of any comprehensive payout policy framework. We then describe the Miller and Modigliani (1961) payout irrelevance proposition, and consider the effect of relaxing the assumptions on which it is based. We consider the role of taxes, asymmetric information, incomplete contracting possibilities, and transaction costs.The tax-related literature on dividends explores the implications of differential taxes on dividends and capital gains on stocks' valuation and firms' propensity to pay out cash in the form of dividends. The issues investigated in this literature are of central importance to corporate finance and asset pricing. It is important to understand the degree to which investor taxes are impounded into security prices, which in turn can affect investment returns, the cost of capital, capital structure, investment spending, and governmental revenue collection. The overall empirical evidence on this issue appears to indicate that from a tax perspective, dividends should be minimized.We review the theoretical as well as empirical literature on Signaling/Adverse Selection models and Agency models. The accumulated evidence indicates that changes in payout policies are not motivated by firms' desire to signal their true worth to the market. There is no evidence that firms that increase their dividends experience an unexpectedly high earnings or cash flow in subsequent periods. The literature does point out however, that changes in cash payments are negatively associated with firms' risk profile. This and other evidence seem to be consistent with the notion that both dividends and repurchases are paid when firms have excess cash flows in order to reduce potential overinvestment by management.We also review the issue of the form of payout and the increased tendency to use open market share repurchases. Evidence suggests that the rise in the popularity of repurchases increases overall payout and increases firms' financial flexibility. It seems that young, risky firms prefer to use repurchases rather then dividends. We also observe that many large, established firms and those with more volatile earnings substitute repurchases for dividends. We believe that the choice of payout method and how payout policy interacts with capital-structure decisions (such as debt and equity issuance) are important questions and a promising field for further research.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:finchp:1-07
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/B7GX8-4DXJCWN-Y/2/86bf045f5c554a329a477266f4e95fd3
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finchp:1-07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.