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Payout Policy

  • Franklin Allen
  • Roni Michaely

This paper surveys the literature on payout policy. We start with a description of the Miller-Modigliani payout irrelevance proposition, and then 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 accumulated evidence indicates that changes in payout policies are not motivated by firms' desire to signal their true worth to the market. Both dividends and repurchases seem to be paid 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 increased overall payout and increased firms' financial flexibility.

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File URL: http://fic.wharton.upenn.edu/fic/papers/01/0121.pdf
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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-21.

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Date of creation: Apr 2002
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Handle: RePEc:wop:pennin:01-21
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