Corporate Payout Decisions Research Articles

The Proposal of Corporate Payout Decisions’ Modelling

Decisions on a company’s profit sharing are the most important financial decisions for both the shareholders as a source of additional income and the company as the source of cash outflow. The net profit can be transferred to the shareholders in the form of dividends or stock repurchases. Due to the fact that for both, dividends and share repurchase, the source of payments is the net profit (either last year profit, or retained profit), it can be assumed that decisions regarding dividend payments and share repurchases are interdependent. Therefore, a very important and so far without an unequivocal solution is the problem of measuring the relationship between decisions on dividend payments and share repurchases (whether to pay out a company’s profit in one of the forms, in both forms or at all). Taking into consideration the possibility of interdependence of both forms of corporate payout policy as well as the fact that data describing payout policy are of panel nature and the relationships between the decisions and the determinants may be non-linear, two simultaneous equations second order panel binomial choice model with random specific effects, the parameters of which are estimated in the same way as in the two stage least squares, was suggested for modelling the payout policy. The modelling procedure was verified by the estimation of the model on a balanced panel of 153 companies listed on the Warsaw Stock Exchange over the period 2008–2016 (1,377 observations). The study results show that the proposed procedure enables the selection of appropriate factors determining the decisions on dividends and share repurchases and the assessment of the relationship between them. It takes into the consideration the panel nature of the data and the possibility of heterogeneity and removes the phenomenon of endogeneity in the model, thereby, filling an existing gap in the literature on corporate payout decisions.

Institutional Investor Heterogeneity and Corporate Response to the Covid‐19 Pandemic

We examine the role of institutional investors in determining firms’ decisions whether to reduce dividends and share buybacks during the Covid‐19 pandemic. Our simple model predicts that the probability of cuts in payouts is linked to the holdings and types of institutions. We link our model to the attention‐based theories of the firm. We posit that the highly proximate nature of the pandemic may encourage greater risk aversion in organizations. Consequently, the presence of institutions that actively engage with managers results in a reduction in shareholders’ payouts during the pandemic to enable firms to deal with increased uncertainty, while institutions that seek short‐term value releases reduce the probability of cuts. We test our hypotheses using novel hand‐collected data on shareholders’ payout cuts in the UK during the Covid‐19 lockdown. We find that in firms with larger institutional holdings, shareholders’ payouts are more likely to be reduced as a response to the pandemic. However, institutional heterogeneity matters as institutions with a view to improve firms’ long‐term growth are more likely to affect corporate payout decisions. In contrast, institutions that focus on regular income (e.g. pension funds) seem to resist cuts even in the aftermath of a severe exogenous shock like the Covid‐19 pandemic.

Local Peer Influence on Corporate Payout Decisions

Local Peer Influence on Corporate Payout Decisions

Cost management and corporate payout decisions

Cost management and corporate payout decisions

Pan(dem)ic reactions in Turkish stock market: evidence from share repurchases

Share repurchases have been widely used in global markets for years for various purposes such as to pay out cash, to stabilize stock prices, and so on. However, their use has recently been challenged due to the economic and financial uncertainty imposed by the COVID-19 outbreak. Not only governments have put bans or restrictions on the repurchasing transactions but also some major companies themselves have suspended their buyback programs to preserve cash. On the other hand, repurchase activity has manifested itself in Turkish capital markets somewhat unexpectedly under uncertain market conditions. This study is one of the first attempts to explore the impact of share repurchase transactions on stock returns in an emerging market severely hit by COVID-19. Our analyses reveal that market reaction to repurchase activity in the aftermath of the pandemic declaration of March 11, 2020 was significantly positive. Moreover, short-term stock performance of repurchasing firms was far greater than that of their non-repurchasing peers. These results have important policy implications in terms of corporate payout decisions which have recently been challenged by the new coronavirus.

Stakeholder orientation and corporate payout policy: Insights from state legal shocks

Abstract We employ a difference-in-differences estimation approach to examine the impact of stakeholder orientation on corporate payout policy. The empirical test exploits the enactment of US state-level constituency statutes, which allow directors to consider stakeholders and long-term interests in corporate decision making. We find that firms incorporated in states that have adopted constituency statutes significantly reduce share repurchases, whereas the effects of statute enactment on total payout and dividend payments are marginal and insignificant, respectively. We further show that the negative statute effect on share repurchases is more pronounced for firms that are in financial distress or are close to default, and firms in consumer-focused and high-polluting industries. Overall, our findings indicate that promoting stakeholder orientation can have a significant impact on corporate payout decisions.

Pan(dem)ic Reactions in Turkish Stock Market: Evidence from Share Repurchase Transactions

This study attempts to explore the impact of share repurchase transactions on stock returns in Turkey as one of the emerging markets severely hit by COVID-19. Event study analyses reveal that market reaction to repurchase activity in the aftermath of the pandemic declaration of March 11, 2020 was significantly positive. Moreover, short-term stock performance of repurchasing firms was far greater than that of their non-repurchasing peers. These results have important policy implications in terms of corporate payout decisions which have recently been challenged by the new coronavirus.

Does earnings transparency affect corporate payout decisions?

PurposeThe paper examines how earnings transparency affects dividend payouts for Indian firms. The authors also explore the channels through which earnings transparency affects dividend payouts.Design/methodology/approachThe authors employ panel data estimation with fixed effects to examine the role of earnings transparency on dividend payouts. The authors also use path analysis to explore causation. The paper uses a sample of more than 2000 Indian listed firms, over the period 2001–2016.FindingsThe authors report that firms showing grater earning transparency pay more cash dividend. Their results do not support the signaling hypothesis about the dividend. However, these results provide explicit support to the theory that corporate dividend policy is an outcome of information asymmetry. Moreover, the path analysis reveals the effect of earnings transparency on corporate payout through the financial constraint channel. The results are robust to idiosyncratic controls; alternate measures of payout; alternate models; endogeneity concerns; and the alternate channel of returning money to stockholders.Practical implicationsManagers should also examine earnings transparency while formulating an adequate dividend policy for their firms. This study also helps investors to identify dividend-paying stocks.Originality/valueThis study particularly contributes to the literature examining the effect of earnings quality on dividend payouts through its effect on financial constraints. We, therefore, connect two streams of research that contemplate the relation between accounting-based information variables and dividend payouts and the relationship between financial constraints and dividend payouts. Moreover, using path analysis uniquely, the authors provide evidence on the relative importance of both the direct and the indirect link.

Principal–principal agency conflicts, product market competition and corporate payout policy in China

PurposeThe purpose of this paper is to examine the interaction between competition and corporate payout policy and more specifically to answer the question that whether competition mitigates the principal–principal agency conflicts and influences firms to distribute dividends to shareholders in Chinese corporations.Design/methodology/approachThis research models measures of competition with scaled measures of dividends and analyzes a sample of 16,730 firm-year observations from Chinese-listed manufacturing firms for the period spanning 2003 to 2016. Further, this research uses the Tobit model (a censored regression) to empirically test the proposed hypotheses.FindingsThis research finds that intense competition not only mitigates agency problems and forces firms to disgorge cash but also increases a firm’s likelihood to pay dividends and weakens the negative association between agency conflicts and dividends.Practical implicationsThe results show an important policy implication for the industry. As the principal–principal agency conflict restrains the dividends, the regulatory authorities could encourage a competitive environment and a more diverse ownership structure to induce a higher dividend rate and protect the minority shareholders. In addition, this study also has implications for other emerging markets characterized by concentrated ownership and principal–principal agency problems.Originality/valueThis study adds to the literature related to the disciplinary role of competition and identifies competition as a significant determinant of corporate payout policy. Furthermore, this research extends earlier research on corporate payout decisions that besides firm-level corporate governance and country-level legal system, industry-level competition also influences corporate payout decisions, significantly.

Payout policy decisions: the effect of compensation structures

ABSTRACTThis study examines the relation between CEO compensation structures and corporate payout policies from 2008 to 2015. The literature focuses on equity-based compensation, and few studies emphasize debt-based compensation. These two types of compensation structures have different features and thus induce managers to choose different payout policies. Using total payouts, dividends, and repurchases as three proxies for corporate payouts, we find that the relation between CEO equity-based compensation structures and total payouts is statistically trivial. However, when we break down corporate payout policies into dividend payouts and share repurchases, we find that CEOs with large options holdings decrease dividend payments and increase share repurchases. We also find that CEOs with large inside debt holdings pay more dividends to shareholders, but we find no significant effect on repurchase payouts. Our findings suggest that ignoring compensation types may veil their differing effects on corporate payout decisions.

Short‐selling constraints and corporate payout policy

AbstractThis study shows that managers adjust corporate payout policies to counteract intensified short‐selling pressures following the removal of a short‐selling constraint. We use a controlled experiment, the Regulation SHO pilot program, to find that changing the short‐selling rule brings small companies to increase cash dividends, but not to repurchase more shares. Because paying dividends is costly, it is acknowledged as a more reliable signal of stock undervaluation than share repurchase. While our evidence suggests that companies select this payout strategy to deter predatory short sellers, it also shows that a short‐selling activity has a causal effect on corporate payout decisions.

What do firms do when dividend tax rates change? An examination of alternative payout responses

This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into the preceding December. To our knowledge this is the first evidence in the literature about changes in the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making corporate payout decisions.

Organizational Structure and Corporate Payout Policy

We examine how organizational structure affects corporate payout policies. Conglomerates (multi-segment firms) pay out more than pure plays (single-segment firms) in both cash dividends and total payouts (defined as cash dividends plus share repurchases). Further, corporate payouts increase as the cross-segment correlation (cash flow or investment) in a conglomerate decreases. The above effects are more pronounced for regular cash dividends than for special cash dividends or stock repurchases. To address the endogeneity issues, we also examine corporate payout changes around M&As. Corporate payouts increase after M&As, especially among M&As in which acquirers and targets are less correlated (earnings or investments). The results suggest that retaining earnings to keep financial slack is an important consideration when firms make corporate payout decisions.

What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses to Dividend Tax Rate Changes

This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into the preceding December. To our knowledge this is the first evidence in the literature about changes in the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making corporate payout decisions.

Does Corporate Board Diversity Affect Corporate Payout Policy?

This paper investigates whether board diversity has a significant impact on corporate payout decisions. Previous studies exclusively focus on examining the relation between a measure of firm performance and board diversity. The major advantage of our study is to investigate the direct impact of board diversity on a major corporate decision - i.e., dividend payout policy. We find that firms with diverse boards are more likely to pay dividends and tend to pay larger dividends than those with non-diverse boards. After controlling for various firm characteristics and exploring alternative explanations for the positive association between board diversity and dividend payout policy, our results suggest that board diversity has a significant impact on dividend payout policy. The impact of board diversity on dividend payout policy is particularly conspicuous for firms with potentially greater agency problems of free cash flow, suggesting that diverse board helps mitigate the free cash flow problem. Our findings are consistent with the argument that board diversity enhances the monitoring function of directors for the benefit of shareholders. We also show that significantly larger portion of firms pay dividends after they added a diverse director to their boards and that firms pay significantly higher dividends after adding a diverse director for the first time. However, the change in dividend payout ratio is not significant when firms add another diverse director to their already diverse boards. Also, the benefits of board diversity are not materialized when directors share the same gender or ethnic tie with the CEO. Our findings have an important implication for policies aiming to increase the number of diverse directors in corporate boardrooms. What makes the significant difference is not the sheer number of diverse directors in the board but the diversity they bring to the board.

Revisiting corporate dividends and seasoned equity issues

Information signaling is regarded as an important motivating factor in corporate payout decisions, particularly with regard to cash dividends and the costly information signaling which they provide. Although Loderer and Mauer (1992) find little evidence to suggest that the announcements of firms’ equity offers are timed to arrive just after dividend declarations as a means of supporting the offer price. Using updated data, we determine that the dividend declaration does have a positive effect on the market reaction to equity offering announcements. We find that the abnormal returns from the announcement of seasoned equity offerings (SEOs) were −1.45 per cent for those SEO firms which had already made dividend declarations, whereas the returns for those SEO firms where the equity issue did not immediately follow a dividend declaration were −1.83 per cent. In this study, we interpret the changes in the impact of the dividend declaration on the equity offering announcement using the ‘tax regulation hypothesis’ and the ‘information asymmetry hypothesis’, and find that while our empirical results provide strong support for the latter, they provide only weak support for the former.

Insiders' Tax Preferences and Firms' Choices between Dividends and Share Repurchases

AbstractThis paper investigates whether corporate payout policy is associated with insiders' share holdings and their tax preferences. We find that insider ownership and the implied tax liabilities are positively related to a firm's propensity to employ share repurchases. Firms with higher levels of or greater increases in insider ownership prefer stock repurchases to cash dividends. This relation is more significant in years when dividends were more tax disadvantaged relative to capital gains. Our findings are robust to the endogeneity of insider ownership and the inclusion of various control variables such as firm size, permanence of cash flows, growth opportunities, institutional ownership, and executive stock options. Overall, our results suggest that personal tax considerations from insiders affect corporate payout decisions.

Insiders' Tax Preferences and Firm's Choice Between Dividends and Share Repurchases

This paper investigates whether corporate payout policy is associated with insiders' share holdings and their tax preferences. We find that insider ownership and the implied tax liabilities are positively related to firms' propensity to employ share repurchases. Firms with higher levels of or greater increases in insider ownership prefer stock repurchases to cash dividends. This relation is more significant in years when dividends were more tax-disadvantaged relative to capital gains. Our findings are robust to the endogeneity of insider ownership and the inclusion of various control variables such as firm size, permanence of cash flows, growth opportunities, institutional ownership, and executive stock options. Overall, our results suggest that personal tax considerations from insiders affect corporate payout decisions.

Tax Policy and the Dividend Puzzle

This paper offers a new explanation of the dividend puzzle, based upon a model in which firms attempt to signal profitability by distrubuting cash to shareholders. I assume that dividends and repurchases are identical, except that dividends are taxed more heavily. Nevertheless, I demonstrate that, under certain plausible conditions, corporations will pay dividends. Indeed, some firms will actually pay dividends, and then retrieve a portion of these payments by issuing new equity (perhaps through a dividend reinvestment plan), despite the fact that this appears to create gratuitous tax liabilities. In addition to providing an explanation for the dividend puzzle, I also derive a number of strong results concerning corporate payout decisions and government tax policy. Some of these results are surprising. For example, the relationship between repurchases and firm quality is hump-shaped. Moreover, despite the fact that a higher dividend tax rate depresses dividend payments, it does not affect either government revenue or welfare.