Corporate Payout Policy Research Articles

Market Structure and Corporate Payout Policy: Evidence from a Natural Experiment

Market structure friction has first-order effects on corporate payouts. The 1994 NASDAQ Manning Rule, the 1997 tick size reduction, the 2001 decimalization, and the jumpstart of NYSE algorithmic trading in 2003 dramatically increased share repurchases, whereas the 2016 Tick Size Pilot, which partially reversed these reforms, significantly reduced share repurchases. Our results provide the first unified interpretation that helps to resolve two puzzles in the payout literature. The dividend puzzle exists because previous research has overlooked the microstructure cost of executing share repurchases. Buybacks increase relative to dividends over time because market structure reforms gradually reduce the cost of repurchases.

Earnings quality and corporate payout policy linkages: An Indian context

We investigate the role of accounting quality as an antecedent of dividend payout decision of firms, for both dividend levels and dividend event, in an emerging market context. Using the data for Indian firms through the years 2006–2016, we evaluate the impact of discretionary accruals on payout decision employing Tobit and Logit regression models amid set of idiosyncratic controls. We report that better earnings quality, on average, is associated with large dividend payments for Indian firms. Moreover, the likelihood of dividend payment reduces with poor earnings quality and more so when earnings manipulation is done to increase earnings. Nonetheless, we show that higher earnings quality reduces dividends during the crisis period and also for group-affiliated firms. However, the same doesn’t hold true for dividend likelihood. The relationship is robust to the idiosyncratic controls and the causality test confirms that results are not susceptible to endogeneity issue. Overall, we conclude that better earnings quality takes care of free cash flow problems and alleviates the agency and information asymmetry related costs, thereby stimulating payout policy.

Employment Protection and Payout Policy

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

Corporate Payout Policy and CEO Compensation Structure

This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. Specifically, it studies the effects of CEO compensation structure, firm characteristics, and dividend payout policies on dividend type and relative dividend size.It finds CEO salary is positively associated with cash dividends, share repurchases, and relative dividend size whereas CEO salary (compared to bonus) as a percentage of total compensation has negative effects on cash dividends and share repurchases. It also discovers CEO stock awards as a percentage of total compensation are positively associated with share repurchases and CEO option awards are negatively related to cash dividends.In addition, this paper shows larger firms and firms with more free cash flow distribute more cash dividends and share repurchases. On the other hand, firms with higher leverage ratio and more investment opportunities prefer to save earnings for future re-investment projects. Finally, it show dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. The results of this study suggest that CEO compensation components affect CEOs’ dividend payout decisions: when CEOs’ stock award increases, they prefer to use share repurchases; when CEOs’ option award increases, they prefer not to use cash dividends.

Having a Finger in the Pie: Labor Power and Corporate Payout Policy

AbstractExploiting time‐series data on labor laws from 39 countries, we investigate how labor power influences firms’ payouts. We find that legislative changes that strengthen labor power reduce firms’ dividend payments and total payouts. The payout restriction effect of labor power is more pronounced in firms with greater labor intensity and in firms operating in countries with broader collective bargaining coverage and more effective law enforcement. Tightened operating flexibility and excess wage extraction are two plausible channels through which labor power affects payouts. These findings indicate that labor power is another important country‐wide institution that shapes corporate payout policy.

Organizational Form and Corporate Payout Policy

We examine how organizational form affects corporate payouts. Conglomerates pay out more than pure plays in both cash dividends and total payouts (cash dividends plus share repurchases). Furthermore, their payouts are more sensitive to cash flows compared to pure-play firms. The sensitivity of payouts to cash flow increases as the cross-segment correlation in a conglomerate decreases. Corporate payouts increase after mergers and acquisitions (M&As), especially among M&As in which acquirers and targets are less correlated. These results suggest that the coinsurance among different divisions of a conglomerate allows them to pay out more cash flow to their shareholders than pure-play firms.

The Relationships between Corporate Payout Policy and Earnings Quality

This study empirically analyzes the relationships between payout policy and earnings quality by using panel data from Korea Exchange-listed firms. Proxies for earnings quality are estimated as the quality of three accruals based on the Dechow, Sloan and Sweeney (1995) model, the Kasznik (1999) ΔCFO (change in cash flow from operations) model, and the Kothari, Leone and Wasley (2005) ROA (return on assets)-performance-matched-discretionary-accrual model, respectively. The main results of this study can be summarized as follows. Dividends have significant and positive effects on earnings quality, implying that dividends are associated with higher earnings quality, confirming the hypothesis on information content of dividends. Stock repurchases also have significant and positive effects on earnings quality, implying that stock repurchases are associated with higher earnings quality. Although stock repurchases are increasingly being used as dividend-substitutes, they do not provide the same level of assurance about earnings quality as dividends. In conclusion, corporate payout policy affects earnings quality positively. More importantly, dividends are associated with higher earnings quality than stock repurchases. This study implies that earnings quality plays a significant role in payout policy choices, thus, contributing to the literature on the relationship between payout policy and earnings quality.

Shareholder-Creditor Conflict and Payout Policy: Evidence from Mergers between Lenders and Shareholders

This paper studies how the conflict of interest between shareholders and creditors affects corporate payout policy. Using mergers between lenders and equity holders of the same firm as shocks to the shareholder-creditor conflict, I find that firms pay out less when there is less conflict between shareholders and creditors, suggesting that the shareholder-creditor conflict induces firms to pay out more at the expense of creditors. The effect is stronger for firms in financial distress. Received March 22, 2017; editorial decision October 17, 2017 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

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.

Corporate Payout Policy and Credit Risk: Evidence from CDS Markets

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth transfer effect.

A method to analyze the corporate payout policy

A method to analyze the corporate payout policy

Reputation as a governance mechanism? Evidence from payout policy of insider‐controlled firms in Taiwan

AbstractThis paper examines the effect of entrenched insiders’ reputational concerns on corporate payout policy in Taiwan, a market in which typical public firms are controlled by a single dominant shareholder who is subject to weak takeover threats and has incentives and abilities to extract private benefits by oppressing minority equity holders. The reputation‐building hypothesis predicts that firms with higher expropriation risk by a controlling shareholder make more payouts to credibly commit not to expropriate minority shareholders, thereby establishing reputation in the capital market for risk diversification and low‐cost external financing. I show that corporate payout intensity is significantly and positively correlated with measures related to the moral hazard of dominant owners. The reputation effect manifests in firms that most value it; the interaction analyses indicate that younger, smaller, or growth firms with higher controlling shareholder expropriation risk pay more cash dividends. Moreover, firms are less likely to omit dividends and more likely to resume dividends when their controlling shareholders are more entrenched. Finally, I show that the value of cash dividends is higher for firms with higher controlling shareholder expropriation risk and that expected dividend increases in these firms are value enhancing.

Individual Investors’ Dividend Taxes and Corporate Payout Policies

The 2012 Dividend Tax Reform in China ties individual investors’ dividend tax rates to the length of their shareholding period. We find that firms facing a reduction (increase) in their individual investors’ dividend tax rates are more (less) likely to increase dividend payout. Such an effect is concentrated in firms where incentives of controlling shareholders and minority shareholders are aligned. Furthermore, investors respond to this tax law change by reducing trading activities before the cum-dividend day and successfully lower their dividend tax penalty. Overall, our evidence enhances the notion that individual investors’ tax profiles shape firms’ payout policies.

Dividend policy: Shareholder rights and creditor rights under the impact of the global financial crisis

The extant literature shows that shareholder and creditor rights positively affect corporate payout policy in a static macroeconomic environment. This study examines how the effects of shareholder and creditor rights on dividend policy change under the impact of the global financial crisis. We posit that this exogenous shock increases agency costs of both shareholders and creditors. With a sample of 133,631 firm-year observations from 23,890 firms incorporated in 41 countries, we find that both shareholder and creditor rights are less effective in dividend decisions in the post-crisis period and the extent of shareholder (creditor) expropriation in the post-crisis period is larger when creditors (shareholders) are adequately protected.

The Effects of Cost Structure on Corporate Payout Policy

The Effects of Cost Structure on Corporate Payout Policy

The impact of uncertainty on payout policy

Purpose The purpose of this paper is to investigate the impact of market-level uncertainty on dividend and repurchase decisions. Design/methodology/approach Using a large data set over a nearly 50-year period, the author examines the choice to pay dividends and repurchase shares using logit and multinomial logit regressions. Findings Market-level uncertainty (measured by a GARCH estimate of volatility, as well as the Chicago Board Options Exchange Volatility Index) is shown to have a statistically significant impact on firms’ payout policy decisions. This impact is different for dividends and repurchases as well as for firms with differing levels of cash flows. As market uncertainty increases, firms with low cash flow levels tighten dividend policy to conserve cash while firms with high cash flow levels become opportunistic through the use of share repurchases. Practical implications The findings allow investors to better understand the connection between shifts in market-level uncertainty and corporate payout policy, specifically through the differing use of dividends and repurchases. Originality/value While prior literature on payout policy has focused on firm-level determinants, this study demonstrates that market-level uncertainty impacts firms’ payout policy decisions uniquely. Furthermore, this is, to the author’s knowledge, the first study to differentiate by relative cash flow level, demonstrating that not all cash flow levels react in the same manner.

On Choosing an Optimal Dividend Policy in India: A Test of Substitution Hypothesis, 1999–2016

We aim to highlight quantitative significance of share buyback in an emerging economy, India by documenting its emergence and trends in stock over time, 1991–2011. The market reaction to the impact of stock repurchase program and dividend increase announcements on share price behavior and their relative signaling power with reference to Indian firms is empirically tested. Further, the problem at hand is to provide insights to what are the determinants of the choice between increasing dividends and utilizing an open market stock repurchase and the impact of that choice on the stockholders’ wealth position in India. The analysis is conducted from two points of view. First, we investigated how the market perceives and reacts to announcements of cash distribution method through dividend increase and to share repurchase. Second, we looked into what determinates corporate payout policy when marginal disbursements could be done with either dividend increase or stock repurchases. Some evidence is provided to reject the null hypotheses that managers do not discriminate in their choice of a payout method. Dividend paying and stock repurchasing firms display significant differences in firm characteristics. Further, firms do not appear to randomly choose between the various disbursements choices. Though weakly, our results suggests that large firms like to substitute repurchases for dividends.

Dividends on Unearned Shares and Corporate Payout Policy: An Analysis of Dividend Equivalent Rights

We investigate an executive compensation device called dividend equivalent rights, which are provisions attached to some options and performance-based equity awards that permit executives to receive dividends on shares they do not own and may ultimately never own. We find that dividend equivalent policies and payments are associated with higher dividends. While shareholders react negatively to such payments, our evidence shows a tendency for these devices to induce companies to disgorge unproductive cash. We estimate their cost at an average increment of 25% to the CEO’s salary but conclude that they can reduce the agency costs of excess cash.

Effects of Bush Tax Cut and Obama Tax Increase on corporate payout policy and stock returns

This article analyzes the effects of the American Taxpayer Relief Act of 2012 (Obama Tax Increase) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Bush Tax Cut) on corporate payout decision and stock returns. Logit and fixed-effect panel data analyses are conducted on all firms listed in NYSE, Amex and NASDAQ in the announcement windows of two, three and four quarters before and after the tax reforms. The results show that the implementation of these tax reforms more persistently affects dividend payments than stock repurchases. It also has a boosting effect on stock returns in the Bush Tax Cut that is 75 % greater than their reducing effect in the Obama Tax Increase, in absolute terms, controlling for dividend payment and stocks repurchase. These effects are robust to different market capitalization sizes. Less solvent firms persistently spend larger dollar amounts in stock repurchases, especially in the announcement of the Bush Tax Cut (+1.11 % per solvency ratio percentage in the [−2Q, +2Q] window). Insolvency is more often significant and with positive impacts on stock returns in the Obama Tax Increase, suggesting that some investors decide to migrate to leveraged-high-growth firms once they realize that some dividend-paying firms could change their dividend policies.

Shareholder-Creditor Conflict and Payout Policy

This paper studies how the conflict of interest between shareholders and creditors affects corporate payout policy. Using mergers between lenders and equity holders of the same firm as an exogenous shock to the conflict between shareholders and creditors, I show that firms pay out less when there is less conflict between shareholders and creditors, suggesting that shareholder-creditor conflict may induce firms to pay out more at the expense of creditors. I also find that the effect is stronger for firms in financial distress.