coporate payout
Corporate Payout Policy
Harry DeAngelo
Marshall School of Business
University of Southern California hdeangelo@marshall.usc.edu Linda DeAngelo
Marshall School of Business
University of Southern California ldeangelo@marshall.usc.edu Douglas J. Skinner
University of Chicago Booth School of Business dskinner@chicagobooth.edu May 2009
Abstract
We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in
Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies — i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors’ behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.
© 2008 DeAngelo, DeAngelo, and Skinner
Foundations and Trends in Finance, Vol. 3, Nos. 2-3 (2008) 95-287
You may distribute this document freely, but please do not post the electronic file on the web. We welcome web links to the document at: http://ssrn.com/abstract=1400682
Foundations and Trends R in Finance
Corporate Payout Policy
By Harry DeAngelo, Linda DeAngelo and
Douglas J. Skinner
Contents
1 Introduction
1.1
1.2
1.3
Before Lintner, There Was Alfred P. Sloan, Jr.
Steve Ballmer and Bill Gates on Payout Policy
Organization of the Discussion
2 Basic Theory: The Need to Distribute Free Cash
Flow is Foundational
2.1
2.2
Harry DeAngelo
Marshall School of Business
University of Southern California hdeangelo@marshall.usc.edu Linda DeAngelo
Marshall School of Business
University of Southern California ldeangelo@marshall.usc.edu Douglas J. Skinner
University of Chicago Booth School of Business dskinner@chicagobooth.edu May 2009
Abstract
We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in
Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies — i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors’ behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.
© 2008 DeAngelo, DeAngelo, and Skinner
Foundations and Trends in Finance, Vol. 3, Nos. 2-3 (2008) 95-287
You may distribute this document freely, but please do not post the electronic file on the web. We welcome web links to the document at: http://ssrn.com/abstract=1400682
Foundations and Trends R in Finance
Corporate Payout Policy
By Harry DeAngelo, Linda DeAngelo and
Douglas J. Skinner
Contents
1 Introduction
1.1
1.2
1.3
Before Lintner, There Was Alfred P. Sloan, Jr.
Steve Ballmer and Bill Gates on Payout Policy
Organization of the Discussion
2 Basic Theory: The Need to Distribute Free Cash
Flow is Foundational
2.1
2.2
References: Warther, V. (1993), ‘Boards, dividends, and sleeping dogs’. Ph.D. Watts, R. L. (1973), ‘The information content of dividends’. Journal of Business 46, 191–211. Watts, R. L. and J. L. Zimmerman (1986), Positive Accounting Theory. Weisbenner, S. J. (2000). ‘Corporate share repurchases in the 1990s: What role do stock options play?’ Working paper, Federal Reserve Woolridge, J. R. (1982), ‘The information content of dividend changes’. Woolridge, J. R. (1983), ‘Dividend changes and security prices’. Journal of Finance 38, 1607–1615. Woolridge, J. R. and C. Ghosh (1985). ‘Dividend cuts: Do they always signal bad news?’ Midland Corporate Finance Journal 3, Zeckhauser, R. J. and J. Pound (1990), ‘Are large shareholders effective monitors? An investigation of share ownership and corporate performance’ Zwiebel, J. (1996), ‘Dynamic capital structure under managerial entrenchment’