The sticky and the slippy: Do payouts crowd out investments? Causal evidence from ratchet behaviour

Despite increasing indebtedness and profitability, US stock-listed corporations are experiencing declining investment rates. This trend aligns with the financialization hypothesis, which suggests that rising shareholder payouts crowd out investments by depleting internal and capturing external funds. However, the lack of a precise distributional mechanism in the literature leaves the demonstrated negative correlation between payouts and investments vulnerable to the critique of reverse causality. Using data from all US stock-listed firms, this paper adopts a distributional battlefield conception of the firm to pinpoint when funds are redistributed from investments to shareholders. I argue that it is not rising payouts that crowd out investments, but rather their inability to fall. When shareholder refuse to yield ground when profits decline, they ratchet up payout ratios by cutting back on investments and taking on debt. I first illustrate that the downward rigidity of shareholder remuneration structures aggregates investment rates based on the frequency of such ratchet behavior. Using a staggered difference-in-differences methodology, I then demonstrate that these ratchet events not only redistribute funds from investments to shareholders contemporaneously but also persistently over the ensuing years.