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A Litner Model of Payout and Managerial Rents

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  • Bart M. Lambrecht
  • Stewart C. Myers

Abstract

We develop a dynamic agency model where payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout in order to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target-adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.

Suggested Citation

  • Bart M. Lambrecht & Stewart C. Myers, 2010. "A Litner Model of Payout and Managerial Rents," NBER Working Papers 16210, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16210
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    References listed on IDEAS

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    1. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
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    • G3 - Financial Economics - - Corporate Finance and Governance

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