Do Firms Consider Economic Outlook When Determining Payout Policy?

Abstract

Payout policy is one of the most important policies set by firms and represents a major use of capital by publicly traded corporations. Firms should consider future economic activity and future firm performance when determining payout policy choices, given they are cash outflow commitments from the firm. We empirically examine whether firms use economic outlook when determining payout policy using publicly available data from the Chicago Federal Reserve Bank and Compustat. We find that economic outlook is positively related to firm payout policy. Specifically, we find that firms are more likely to pay out cash dividends and repurchase shares when economic outlook is positive. Furthermore, when examining only firms already paying dividends and/or repurchasing shares, firms pay greater amounts of cash dividends and repurchase more shares when economic outlook is positive. We are the first, to our knowledge, to examine whether firms use economic outlook to determine their payout policy. Our paper motivates future research in corporate finance to examine how firms use economic outlook when making capital planning decisions.