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Payout Policy

Payout Policy We survey the literature on payout policy, with a particular emphasis on developments in the past two decades. The cross-sectional empirical evidence for the traditional motivations behind firms paying out (agency, signaling, and taxes) is most persuasive with regard to agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts have been made over the past 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motivations, such as changes in compensation practices and management incentives, are better able to explain the observed variation in payout patterns over time than the traditional motivations. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annual Review of Financial Economics Annual Reviews

Payout Policy

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Publisher
Annual Reviews
Copyright
Copyright © 2014 by Annual Reviews. All rights reserved
ISSN
1941-1367
eISSN
1941-1375
DOI
10.1146/annurev-financial-110613-034259
Publisher site
See Article on Publisher Site

Abstract

We survey the literature on payout policy, with a particular emphasis on developments in the past two decades. The cross-sectional empirical evidence for the traditional motivations behind firms paying out (agency, signaling, and taxes) is most persuasive with regard to agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts have been made over the past 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motivations, such as changes in compensation practices and management incentives, are better able to explain the observed variation in payout patterns over time than the traditional motivations. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management.

Journal

Annual Review of Financial Economics – Annual Reviews

Published: Dec 1, 2014

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