Chapter 10 - Payout Policy

Abstract

This chapter surveys the academic literature on payout policy and offers some guidance on directions for future research. Understanding payout policy is important because firms return significant amounts of capital to shareholders in the form of dividends and share repurchases. This chapter provides a survey of payout policy—the return of capital by firms to their equity investors through dividends and share repurchases. It summarizes the statistics on the payout policies of U.S. companies via dividend payments and share repurchases for each year from 1972–2004, in a tabular form. Following this, it presents a review of the Miller and Modigliani arguments regarding the irrelevance of payout policy and presents a summary of the literature on the interaction between both corporate and personal taxes and the firm's payout choices. It then provides a discussion of how conflicts of interest and agency problems among the firm's various claimants affect payout choices. Furthermore, it examines the role of asymmetric information in determining the firm's payout decisions and reviews the literature on share repurchase. Finally, it presents an overview of a study of some alternative theories and new stylized facts regarding payout policy; and a presents summary of the state of knowledge on payout policy.