Financing payouts
By: Joan Farre-Mensa, Roni Michaely, Martin Schmalz
Contributors: Michaely, Roni, author; Schmalz, Martin, author; Harvard Business School
Series: Working paper / Harvard Business School -- 15-049; Working paper (Harvard Business School) -- 15-049
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 48
Description: Despite the obvious interest in payout policy, no paper to date has systematically analyzed how payouts are funded, perhaps because the answer might have appeared just too obvious: payouts are funded with free cash flow -- at least over long enough time periods. In stark contrast to this commonly held view, we find that firms rely on the capital markets to finance a third of aggregate payouts, mainly with debt but also with equity. Such "financed payouts" are widespread, persistent, prevalent both among dividend-paying and repurchasing firms, and large in magnitude. Standard interpretations of agency or signaling theories are unable to explain this behavior. We argue, however, that our findings are consistent with a reinterpretation of ideas related to agency conflicts and a holistic view of corporate financial strategy that examines payout and capital structure decisions jointly.
Notes: "December 2014" -- Publisher's website.

Includes bibliographical references (pages 34-36).