Firm Payout Research Articles

The effect of the Tax Cuts and Jobs Act of 2017 on corporate investment

This study examines the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on U.S. corporate investment. We examine U.S. firms and compare them to Canadian firms from 2010 to 2019 in a multivariate firm fixed-effects difference-in-differences analysis. Our results indicate that investment increases for U.S. firms relative to Canadian firms after the tax cuts. We also find that capital intensive and financially constrained firms increase investment the most. We explore how the TCJA impacted firm payouts and find some evidence that the tax cuts are associated with increased dividends. The paper contributes to the literature by providing evidence on the effects of the TCJA on corporate investment which have been debated extensively by politicians, journalists, tax policy experts, and academics.

The Influence of Corporate and Country-Level Governance on Firm Payout Policies: A Summary of Worldwide Market

Since the pandemic in 2020, many firms paused or reduced their dividend payout as shifting to a defense strategy. However, the total dividends payout in the second quarter of 2022 by S&P500 firms is 11.8% more than that in the period of 2021 and share buyback spending is 11.7% higher. Thus, the companys payout policy is still a significant concern for investors. This research summarizes several findings on the interaction of payout policy with corporate governance and with country-level governance and discusses the dependence between these two factors. This research finds that country-level governance is positively related to a firms payout policy, and because of the correlation between firm-level and country-level governance, the interaction between firm-level governance and dividend policy varies with legal strength: in weak legal regimes, stronger corporate governance leads to higher dividend payout, and in strong legal regimes, they correlate in the opposite way, as the shock repurchase is preferred over dividend.

Does Peer Matters? How Peer Influence Firm Payout Policies: Evidence from Pakistan

Payout decisions are receiving more interest from an investor’s point of view. The purpose of this study is to investigate the effect of peer payout policies on a firm payout policy in Pakistan. This study employs an instrumental variable technique to overcome the endogeneity issue, which is based on peers' idiosyncratic equity shocks. The peers' payout policies have a causal link with a firm payout policy. The effect of peer pressure on firm payout is more evident in companies that compete in a more competitive market and have a good information environment. The firms that are similar in size or resource, especially young and small firms, are more responsive to their industry peers. This study provides channels for managers or policymakers to become more optimistic about formulating the payout policy to attract investors' attention and to compete more fiercely in the market.

Repatriation tax and dividend policy

AbstractThis paper examines the impact of the repatriation tax provision of the Tax Cuts and Jobs Act (TCJA) on firms’ dividend policy. Our findings show that the firms most affected by the repatriation tax provision, that is, those with high foreign sales, reward shareholders by substantially increasing dividends per share, but maintain aggregate dollar dividends. Dividend per share (DPS) increasing firms repurchase at significantly higher magnitudes than non‐dividend per share increasing firms, suggesting that DPS increasing firms partially utilize repurchases to avoid substantial increases in their long‐term aggregate dividend commitments. We also investigate whether managers reap the rewards of dividend increases, finding that firms with high levels of executive ownership and foreign sales are more likely to increase their dividends per share after the TCJA was enforced. Overall, our results highlight the importance of the interconnection between dividends and repurchases in examining the response of firm payout policy to external shocks.

The relationship between dividend payout and economic policy uncertainty (EPU), ownership concentration and free cash flow in Chile

This study examines how the dividend payout of Chilean firms is associated with economic policy uncertainty (EPU), while controlling for ownership concentration and free cash flow, to consider agency problems. Its contribution is twofold. First, it detects a non-linear, U-shaped relation between EPU and dividend payout, which is a novel finding. Second, this result holds only in cases of high EPU. No significant relationship in cases of low EPU was detected. The sample comprises an unbalanced panel data of 1034 observations from 2005 to 2016. Including ownership concentration as an independent variable leads to a negative association between it and dividend payout, showing a potential agency problem between the main shareholder and the minorities. If free cash flow is considered in the model, then the results show a positive relation between free cash flow and dividend payout, which implies the mitigation of the agency problem. Finally, once both variables (ownership concentration and free cash flow) are considered together as explanatory variables, only free cash flow turns out to be statistically significant and positively associated with dividend payout.

Financial Flexibility and Firm Behavior: Evidence from Emerging Market

investment opportunities that increase shareholder value. Therefore, the purpose of this study is twofold: to explore the difference in characteristics of financially flexible firms from non–flexible firms. Secondly, to investigate the effects of this flexibility on financial decisions and the value of a firm. The sample is drawn from the KSE100-indexed firms listed at the Pakistan Stock Exchange, showing 80 percent of the market capitalization. The data is collected for eight years from 2015-2022. The ordinary least square regression with year and industry fixed effect is used to estimate the proposed hypotheses. The results of the study revealed that financial flexibility has a significant and positive effect on the profitability, dividend payout, and cash holdings of Pakistani firms. At the same time, it significantly negatively influences the firm's value and investment ability. The results reveal a significant difference between financially flexible firms. FF firms have higher ROA, cash holdings, and dividend payout than non-FF firms and lower leverage ratios than non-FF firms. Financial decision-making has a significant effect on the firm value. The consequences of maintaining financial flexibility or low leverage below the optimal debt level remain a puzzle. The financial markets need to improve, which provides more debt and equity securities for firms to improve their financial mix. The stock market improvement also adds to the emerging market's economic health. This study added to the limited literature on financial flexibility or low-leverage puzzle in the emerging market. The results prove that listed firms maintain their debt capacity to avoid future uncertainty when profitable investments are available.

Dividends Payout and Earnings Predictability: Evidence from a Developing Country

This study investigates the relation between dividends payout and earnings predictability of firms listed on the Egyptian Stock Exchange as an emerging African market. We depend on a sample of firms listed on the Egyptian stock exchange (EGX100) during 2014-2018. To test the hypotheses, we use two independent sample t-test and OLS regression. The principal analysis revealed that dividends payout improves the ability of current earnings to forecast firms’ future earnings. Results also indicated that dividends payout could enhance the ability of current earnings to forecast one year-ahead cash flow. To the best of our knowledge, this is the first study that examines the implications of dividends payout on earnings predictability in the Egyptian market. The findings present new insights to investors, researchers, and regulators concerned with agency conflicts of interest within the firm. It also presents evidence on the potential alternative mechanisms for decreasing agency costs in African emerging markets.
 
 Received: 8 April 2022 / Accepted: 4 August 2022 / Published: 2 September 2022

Auditee’s payout policies: does audit quality matter?

PurposeThis study aims to explore whether an auditee’s audit quality influences its payout policies (i.e. each form of dividend payouts and stock repurchase payouts).Design/methodology/approachBased on a panel data of US public firms, from 2004 to 2018, and Tobit estimators, this study aims to examine whether auditees’ audit quality is related to their payouts and under which circumstances (from the standpoints of auditees’ information asymmetry, refinancing risk, corporate governance and financial constraints) the aforesaid associations are more pronounced.FindingsThe findings of this study imply that auditees’ audit quality is positively related to auditees’ payouts. Further examination suggests that this positive relationship is stronger for auditees with higher information asymmetry, lower financial constraints and refinancing risk and for those with weaker governance. Finally, this study documents that dividend payouts are more stable for auditees with high-quality audits than those with low-quality audits. The results support the view that auditees’ transparency (reflected in high-quality audits) could be a crucial driver and rationale for their payout policies and, ultimately, overall policies.Originality/valueBy combining two different research lines of audit quality and corporate payout policies, this paper adds to both literature, as it is a novel one to document the contributing function and impact of audit quality on auditee’s payout policies (tangible financial decisions and policies). The findings are significant considering that it documents high-quality audits affecting the auditees besides their financial reporting quality. This study also shows the moderating roles of the auditee’s information asymmetry, rollover risk, financial constraints and corporate governance in the relation between audit quality and an auditee’s payout decisions. Furthermore, the findings can help shareholders (aiding them in determining companies with high payout policies), regulators and policymakers who emphasize audit quality. The results indicate that policymakers’ and standard setters’ efforts fostering high-quality audits should be in conjunction with firm payout standards.

Factors Influencing Dividend Payout of Firms Listed at the Nairobi Securities Exchange, Kenya

While various factors influencing a firms’ dividend policy have been evaluated by researchers, the outcome of these studies has not entirely resolved the controversies linked to dividend decision. There is little information on factors affecting dividend payout in different sectors among the listed firms in the NSE. The main objective of this research was therefore to establish the effect of defined firm characteristics on dividend policy of firms listed at the Nairobi Securities Exchange. The specific objectives of the study were to establish the effect of size on dividend payout policy of firms listed at the NSE, to evaluate the effect of leverage on dividend payout policy of firms listed at the NSE, to determine the effect of growth on dividend payout policy of firms listed at the NSE, and to establish the effect of liquidity on dividend payout of firms listed at the NSE. This study was based dividend irrelevance theory, dividend relevance theories of the bird at hand. This study employed the explanatory survey research design and the target population of this study was all 64 listed firms in the NSE for the five-year period of 2016 to 2020. The study collected data from 32 firms whose data was complete for the entire period of study. This made 160 observations. The study utilized secondary data which from the NSE handbooks. The data collected was analyzed using descriptive and inferential statistics. Regression results show that; firm size has a positive significant effect on dividend policy of firms listed at the NSE; leverage affects dividend policy negatively and significantly; firm growth has a positive significant effect on dividend policy; and that liquidity has a positive significant effect on dividend policy. The results from the research may benefit potential investors in deciding which sector to invest in. Future researchers in the area of dividend policy may also find results from this study important as it may lay a foundation to their studies.

Dividend Tax Policy and Dividend Payout of Food and Beverages Firms in Nigeria

This study examined the effect of dividend tax policy on dividend payout in selected Nigerian food and beverages firms. The study employed a cross-sectional approach using both explanatory and exploratory design. Fifteen out of twenty one quoted food and beverages firms on the Nigeria stock exchange (NSE) as at December 2018 were randomly selected to constitute the study sample. Four hundred copies of structural questionnaire were distributed but only three hundred and twenty copies were correctly completed and useful for the analysis. The study revealed that dividend tax policy was significant on a dividend payout (f-statistic =27.52; p=0.000) with R-square =0.285. When the moderation variable effect (inflation) was considered, it was also found that dividend tax policy influenced dividend payout of the selected firms (F-statistic=15.89; p=0.000).The study further revealed that tax policy has significant effect on dividend payout in the selected firms. The study therefore recommended that management of firms should adopt more of stock dividend policy than cash concluded payout.

Does firm payout policy affect shareholders’ dissatisfaction with directors?

In this study we investigate the information content of firm payout policy to shareholders. We focus on the association between a firm’s payout policy and shareholders’ satisfaction with board directors, as expressed by the percentage of negative or withheld votes for directors during annual elections (shareholders’ dissent voting). We fill a gap in the literature by using shareholders’ voting results in the election of board members at annual meeting as a setting to examine shareholder perception of firms’ payout policies. We find that higher share repurchase and/or higher dividend payout are associated with lower shareholders’ dissenting votes. We also find that such relationship is conditional on the level of free cash flow, firm future performance, the degree of management entrenchment, and the type of institutional investors. Our study contributes to the payout literature by providing empirical evidence that shows the outcome of shareholders’ votes in director elections may be influenced by the board of directors’ payout decisions.

Dividend payout policies of politically connected firms: Evidence from Malaysia

This study expounds on the debate regarding dividend payouts for different types of politically tied firms in Malaysia. We recognize the heterogeneity of political ties of politically connected firms (PCFs) by government-linked companies (GLCs) and non-GLC PCFs. The results show that PCFs are positively related to dividend payouts and that PCFs, specifically GLCs, pay higher dividends than their counterparts. Additionally, our results demonstrate that high- and low-levered GLCs consistently pay higher dividends than non-GLC PCFs and non-PCFs. These findings imply that GLCs implement special dividend policies, and therefore, a high GLC payout might not be indicative of actual performance. In brief, shareholders and potential investors should be cautious in interpreting firm payout signals.

Do Firms Consider Economic Outlook When Determining Payout Policy?

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.

Financial Flexibility Robustness

I examine how the robustness of investment opportunities influence firm payout policy and cash holdings. By exploiting new measures, the perturbations of q, a novel counterintuitive yet reasonable fact emerge: low robustness of investment opportunities (high perturbations of q) is able to spur firm propensity to pay dividends, lower repurchase shares, and decrease the cash a firm holds simultaneously. Specifically, firms that are likely to hold fewer amounts of cash when the robustness of investment opportunities is low, which is distinct from the standard channel of uncertainty. These results are consistent with firms' liquidity management policies being significantly shaped by robustness concerns.

Dynamic financing and hedging under model uncertainty

ABSTRACT We extend the classic framework to investigate a firm's optimal financing, investment, payout and hedging strategies under model uncertainty (or ambiguity). It shows that model uncertainty has essentially different effects on liquidity policies compared to traditional business risk. A firm facing model uncertainty prefers refinancing less and payout earlier, and the marginal value may be increased when the refinancing option is in the money. Moreover, our model demonstrates that hedging tools play an important role in mitigating the negative impacts on firm value caused by model uncertainty, which illustrates an interesting result that traditional risk management method works well not only on business risk but also on model uncertainty.

Corporate payout policy: does product market competition matter? Evidence from Australia

PurposeThe purpose of this paper is to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system has been in place since 1987.Design/methodology/approachPanel data estimation with industry and year-fixed effects is employed to examine the role of industry competition on dividend payout and share repurchases. The paper uses a sample of ASX200 non-financial firms, including 4,272 observations over the period 1992–2015. To address the endogeneity problem, the authors utilize the event of Australia–United States Free Trade Agreement (AUSFTA), which became effective on 01 January 2005, and perform a difference-in-difference analysis.FindingsThe authors find that firms operating in competitive markets are likely to pay more dividends and repurchase more shares to reduce agency costs. The positive relation between industry competition and dividends is stronger among firms where the CEO and the Chairman of the Board are the same person and among firms with higher market-to-book ratio and higher standard deviation of stock returns. The study results are robust when the authors account for the impact of franking credit on dividend payment. In the difference-in-difference analysis, the authors find strong evidence of a casual relation that product competition drives changes in dividend policy.Practical implicationsThe findings are consistent with the notion that intense product market competition can mitigate agency conflicts between managers and shareholders and with the information signalling explanation of market competition. As such, regulators may want to introduce policies that encourage more market competition (e.g. market deregulation) to enhance market efficiency.Originality/valueThis study incorporates product market competition in explaining the firm payout policy.

Does inside debt help mitigate agency problems? The case with investment inefficiency and payout policies

Although the literature has established that CEO inside debt induces risk aversion, it remains inconclusive whether these CEOs increase firm payout or not. While some studies show that high inside debt CEOs increase firm payout to avoid risky projects, others document that they reduce payout to preserve funds. This study addresses this contradiction by examining a sample of U.S. firms over the 2006–2018 period. Consistent with the agency theory, our results show that CEOs with larger inside debt adjust payout policies to mitigate prior overinvestment. Specifically, they increase payout in the subsequent period if their firm is already overinvested.

The Effect of Product Market Competition and Financing Constraints on Dividend Payout

We examine how product market competition and financing constraints influence firm payout policy. Using Compustat firms for the period 1996 to 2017, we show that competition decreases firms’ propensity to make payouts via dividends more if the firm is financially constrained. These results are consistent with the hypothesis that in the presence of financing constraints, creating internally generated funds (through the reduction of dividends) is more important for firms positioned in competitive markets.

Passive Debt Ownership and Corporate Financial Policy

A recent dramatic rise in the assets managed by passive corporate debt funds has profound implications for firm financing and payout policy. I use fund-specific flows to isolate exogenous increases in firm-level passive debt ownership at a firm. Firms respond to higher levels of passive debt ownership by increasing leverage, consistent with a recapitalization. More passive debt ownership does not lead to risk-shifting, but rather an increase in direct payouts to shareholders. I show that passive debtholders facilitate these effects by reducing aggregate ex-ante and ex-post monitoring. The presence of a bank monitor mitigates the relationship between passive debt ownership and increased payout.

Unlocking Trapped Foreign Cash, Investor Types, and Firm Payout Policy

I study whether trapped foreign cash levels and investor type explain variation in US-based multinationals’ payout policy responses to tax-repatriation-driven cash windfalls. To do so, I use the deemed mandatory repatriation of trapped foreign cash included in the 2017 Tax Cuts and Jobs Act (TCJA). I find my measure of the level of “unlocked” trapped foreign cash (UTC) relates to increases in repurchases and dividends observed post TCJA. I examine whether this increase in payout varies with institutional investor type: transient, dedicated, and quasi-indexers (Bushee 2001). I find that firms with high UTC and low (high) dedicated ownership see an increase (no change) in repurchases post TCJA. I do not observe similar variation with investor type for dividends. Finally, mechanism tests show that HI UTC, HI DED (LO DED) firms tend to have higher (lower) cash balances, lower (higher) payouts, and higher capital expenditures when previously capital constrained. This suggests that firms use UTC in a way that minimizes agency frictions through the presence of dedicated investors who serve as effective monitors in the setting. For this reason, HI UTC, LO DED firms have higher levels of share repurchases and lower cash balances once the UTC windfall arrives in an effort to mitigate agency frictions stemming from an inability to effectively monitor managers for the long-term.