A Longitudinal Analysis of Corporate Payout Policies

Abstract

In this paper, I conduct a longitudinal analysis of corporate payout policies that accounts for the dynamic nature of these decisions and for the interaction among investment decisions and payout policies. The estimation is done with a VAR model of investment opportunities, profitability, total payout-dividends plus share repurchases, and the split of the total payout between dividends and share repurchases. I control for changes in the legal treatment of share repurchase in 1982 and for changes in the relative taxation of dividends and of capital gains. I find that * An increase in the taxation of capital gains relative to dividends causes a shift in the split of the total corporate payout away from share repurchases and towards dividends * Corporate investment decisions determine payout policies and not the other way around * Unexpected increases in corporate payout are associated with long-term subsequent increases in profitability * The information content of an unexpected increase in dividends is stronger than an equal-size unexpected increase in share repurchases * Earnings better measure firm profitability than cash flows in the determination of corporate payout policies