Corporate Payout Policy

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Corporate Payout Policy synthesizes the academic research on payout policy and explains "how much, when, and how". That is (i) the overall value of payouts over the life of the enterprise, (ii) the time profile of a firm's payouts across periods, and (iii) the form of those payouts. The authors conclude that today's theory does a good job of explaining the general features of corporate payout policies, but some important gaps remain. So while our emphasis is to clarify "what we know" about payout policy, the authors also identify a number of interesting unresolved questions for future research. Corporate Payout Policy discusses potential influences on corporate payout policy including managerial use of payouts to signal future earnings to outside investors, individuals' behavioral biases that lead to sentiment-based demands for distributions, the desire of large block stockholders to maintain corporate control, and personal tax incentives to defer payouts. The authors highlight four important "carry-away" points: the literature's focus on whether repurchases will (or should) drive out dividends is misplaced because it implicitly assumes that a single payout vehicle is optimal; extant empirical evidence is strongly incompatible with the notion that the primary purpose of dividends is to signal managers' views of future earnings to outside investors; over-confidence on the part of managers is potentially a first-order determinant of payout policy because it induces them to over-retain resources to invest in dubious projects and so behavioral biases may, in fact, turn out to be more important than agency costs in explaining why investors pressure firms to accelerate payouts; the influence of controlling stockholders on payout policy --- particularly in non-U.S. firms, where controlling stockholders are common --- is a promising area for future research. Corporate Payout Policy is required reading for both researchers and practitioners interested in understanding this central topic in corporate finance and governance.
 

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Contents

Introduction
1
11 Before Lintner There Was Alfred P Sloan Jr
5
12 Steve Ballmer and Bill Gates on Payout Policy
7
13 Organization of the Discussion
9
Basic Theory The Need to Distribute FCF is Foundational
11
21 Miller and Modiglianis Dividend Irrelevance Theorem
12
22 Payout Policy Matters When MMs Assumptions are Relaxed to Allow FCF Retention
15
23 HomeMade Dividends Do Not Replace the Need for Eventual Payouts
19
73 Can Stock Repurchases Serve as an Effective Permanent Distribution Vehicle?
87
Signaling and the Information Content of Dividends
93
81 Information About Earnings Versus Information About Payouts
95
The Wrong Firms are Paying Dividends and the Right Firms are Not
97
84 An Empirically Supported View of the Role of Dividend Signaling
100
Stakeholder Relations and the Strategic Use of Dividend Policy
101
Behavioral Influences on Payout Policy
105
92 Managers Behavioral Biases and Payout Policy
113

Security Valuation Problems Agency Costs and Optimal Payout Policy
23
31 Myers and Majluf 1984 and the Flexibility Benefits of FCF Retention
24
32 Jensen 1986 and the Agency Costs of FCF Retention
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33 A TimeVarying TradeOff of the Agency Costs and Financial Flexibility Benefits of Retention
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34 A Compact Summary of Main Theoretical Implications
29
Corporate Payouts Scale Concentration and Earnings Linkage
33
41 The Declining Incidence of Firms that Pay Dividends and that Generate Positive Earnings
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42 Payouts and Earnings are Highly Concentrated Among a Relatively Small Number of Firms
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43 Stock Repurchases by DividendPaying Firms
39
Agency Leverage and Cash Balance Consequences
46
Payouts and Earnings A Closer Look
53
51 Earnings and Measured FCF as Proxies for True FCF
54
The Time Path of Dividends and the Time Path of Earnings
57
53 Transitory Versus Permanent Earnings and Changes in Payout Policy
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54 The Managerial Reluctance to Cut Regular Dividends
63
55 Regular Dividends are What is Smoothed and Not Total Payouts
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56 Earnings and Payouts Over the Corporate Lifecycle
69
What is Essential and What is Not
70
Are Dividends Disappearing?
73
61 The Concentration of the Dividend Supply and Its Implications
74
62 The PostFama and French 2001 Literature on the Disappearing Dividends Phenomenon
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What Has Changed and What Has Not
78
Why Do Dividends Survive?
81
71 Dividends Distribute Cash Proportionately to Stockholders
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72 Payout Policies Have Both Transitory and Permanent Components
84
Clientele Effects Transaction Costs Institutional Ownership and Payout Policy
115
101 Institutional Versus Individual Investor Clienteles
116
102 Clientele Theories are Incompatible with the Observed Homogeneity in Payout Practices
119
103 Institutional Versus Individual Stock Ownership and Dividend Policy
120
Controlling Stockholders and Payout Policy
125
111 Payout Policy and the Preferences of Controlling or Influential Stockholders
126
112 Exploitation of Minority Stockholders
129
Using Dividends to Pacify Stockholders
132
Taxes and Payout Policy
135
121 Why Do Firms Make Taxable Payouts if Payout Policy is Irrelevant in the Absence of Taxes?
136
122 Why Doesnt LongTerm Deferral Dominate Immediate Taxable Payouts?
139
123 The Impact of Changes in Tax Laws on Corporate Payout Policy
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124 Why Havent TaxAdvantaged Repurchases Replaced Dividends?
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The Advantages of Stock Repurchases
151
131 Financial Flexibility Advantages of Stock Repurchases and Special Dividends
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132 Repurchases Correct or Exploit Stock Market Undervaluation
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133 Removing Low Valuation Stockholders from the Investor Population
157
134 Stock Repurchases Alter the Allocation of Voting Rights
159
135 Stock Repurchases as a Means of Increasing Reported EPS
163
136 Stock Repurchases and Executive Stock Option Plans
164
137 Transaction Cost Savings and Stock Repurchases
165
Conclusion What We Know About Payout Policy and Promising Avenues for Future Research
167
Acknowledgments
181
References
183
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