A Time-Series Analysis of Corporate Payout Policies

Abstract

I conduct a time-series 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 investments, earnings, total payout, and the split of the total payout between dividends and share repurchases. I control for changes in the legal treatment of share repurchases in 1982 and for changes in the relative taxation of dividends and capital gains. I find that: (i) an increase in the taxation of capital gains relative to dividends shifts the split of total payout away from share repurchase and toward dividends; (ii) corporate investment decisions lead payout policies and not the other way around; (iii) increases in corporate total payout are associated with long-term subsequent increases in earnings; (iv) changes in the composition of corporate payout away from share repurchases and toward dividends are associated with subsequent increases in earnings.