Lower Payout Research Articles

Financial Flexibility and Managerial Incentives

In a setting with moral hazard and optimal compensation contracts, dividends must be coordinated with leverage to maintain efficient investment incentives. Dividends are more flexible than debt, allowing firms to reduce the cost of financial constraints. Dividends, however, also provide managerial flexibility. With low payouts, managers enjoy excessive flexibility over investment choices, and pursue projects that increase their information advantage. This increases the rents they receive under the dynamically consistent compensation scheme. With more disciplined dividends, these furtive investments create a debt overhang problem, such that shareholder wealth is maximized with a compensation scheme that neglects low outcomes (at bondholder expense) and reduces the manager's rents. Investment and compensation choices, therefore, reflect both the flexibility of the financial policy and the flexibility in the manager's dividend choice. When dividends cannot effectively restrict managerial opportunism, short-term debt payments can substitute, but at the cost of default or exacerbating the shareholder-bondholder conflict. The optimal financial policy balances the benefits of financial flexibility and the cost of managerial flexibility. Our theory is closely related to the theory of DeAngelo and DeAngelo (2007), where leverage and dividends combine to provide optimal financial flexibility, while controlling for the agency costs of cash accumulation. Dividends, rather than debt payments, constrain managerial discretion as this preserves the ability to borrow and enhances the ability to issue equity (by enhancing the firm's reputation for returning cash to equity holders). In our analysis, the agency costs of cash accumulation are derived in an explicit and unique manner that operates through managerial information advantages. Disbursements reduce these costs, but may also exacerbate the shareholder-bondholder conflict, which is similar to Myers'(1977) debt overhang problem, but again unique in that it operates through managerial compensation. The optimal financial policy trades off the unique aspects of the agency and debt overhang problems, in contrast to DeAngelo and DeAngelo, where it trades off agency costs illustrated by Jensen (1986) with the security valuation costs illustrated by Myers and Majluf (1984)). Our theory also recognizes that since dividends are designed to control managerial discretion, it may be difficult to induce controlling managers to make disbursements. Short-term debt imposes a stronger commitment, but at the risk of additional costs, so that our financial policy also incorporates Jensen's concern with the relative softness of dividends, which is absent in DeAngelo and DeAngelo.

Financing Frictions and the Substitution Between Internal and External Funds

There is ample empirical evidence of a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This negative relation has been interpreted as evidence for external financing costs arising from capital market frictions such as asymmetric information (e.g., the pecking order theory). We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are \QTR{em}{least likely} to face high costs of external finance (firms that distribute large amounts of dividends, that are large, and whose bonds and commercial papers are rated). For firms in the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to innovations to internal funds. These cross-firm differences hold separately for debt and outside equity financing, and are magnified in the aftermath of macroeconomic movements that tighten financial constraints. We argue that the greater degree of complementarity between internal funds and external finance for constrained firms is a consequence of the interdependence of their financing and investment decisions. Our findings suggest that the negative relation between internal funds and external financing should not be interpreted as evidence for external financing costs.

Hitting the Jackpot or Hitting the Skids: Entertainment, Poverty, and the Demand for State Lotteries

Abstract. State‐sponsored lotteries are a lucrative source of revenue. Despite their low payout rates, lotteries are extremely popular, particularly among low‐income citizens. State officials laud the benefits of lottery proceeds and promote the fun and excitement of participation. This entertainment value is one explanation for lottery demand by the poor: individuals with lower incomes substitute lottery play for other entertainment. Alternatively, low‐income consumers may view lotteries as a convenient and otherwise rare opportunity for radically improving their standard of living. Bad times may cause desperation, and the desperate may turn to lotteries in an effort to escape hardship. This study tests these competing explanations. We examine lottery sales data from 39 states over 10 years and find a strong and positive relationship between sales and poverty rates. In contrast, we find no relationship between movie ticket sales, another inexpensive form of entertainment, and poverty rates.

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

ABSTRACTWe investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor.

Ownership Concentration, Agency Conflicts, and Dividend Policy in Japan

We examine the dividend policy of Japanese firms and find that dividend payout is negatively related to ownership concentration. This result contradicts the argument that dividends are substitute for shareholder monitoring, but supports the assumption that controlling shareholders extract private benefits at the expense of minority shareholders. Consistent with their lower payout, firms with dominant shareholders are less likely to increase dividends when profitability increases and more likely to omit dividends when investment opportunities improve. On the other hand, they are more likely to increase dividend when debt is high and less likely to omit dividends when debt increases, which is tantamount to a wealth transfer from debtholders. Overall, ownership concentration appears to play a critical role in corporate decisions, mainly due to the way it intensifies the agency conflicts between majority and minority shareholders.

High Yield, Low Payout

High Yield and Low Payout What is the optimal combination of dividend yield and payout ratio for the investors? We tested companies within the SP dividends' contribution to total return has risen and will continue to rise in coming years.

A Re-examination of Dividend Policy: A Dynamic Panel Data Analysis

Through a cross sectional analysis of 48 firms, over a seven-year period, from 1996 to 2002, we try to shed some light into two sides. First of all, we research whether managers smooth their dividend policies or not. Besides, we outline the main determinants that may influence the dividend policy pattern. Specifically, we attempt to find answers to the following questions: Do Tunisian firms follow stable dividend policies or not? Do dividend yields differ across industries? What are the main factors that determine the dividend policy making? In the first section, Lintner's model is applied. Our results show that Tunisian firms rely on both current earnings and past dividends. However, it seems that dividends tend to be more sensitive to current earnings than prior dividends. Any variability in the earnings of the corporation is directly reflected in the level of dividends. However, dividend policy does vary across financial and non-financial industries. Our results uncover a low target payout ratio of respectively 16% and 27% for non-financial and financial firms while the adjustment speed respectively ranges from 0.68 to 1.56. Non-financial institutions adopt therefore a more smoothing dividend policy. Secondly, through a fully developed model, we highlight some factors that may influence the dividend policy pattern. First, riskier firms with high financial leverage pay out fewer dividends and have lower dividend yields. Furthermore, high-profitability firms with more stable earnings can also afford more dividends. However, larger investment opportunities deprive firms from higher dividends. Similarly, growing firms distribute fewer dividends. Additionally, dividends serve to reduce agency costs between the shareholders themselves only whereas the conflicts between insiders and outsiders seem to be not resolved with dividends. This matter holds true only in non-financial firms. In this vein, it should be noted that our analysis does show significant differences throughout financial versus non-financial industries. Finally, the size of Tunisian corporations has a systematic negative effect on dividend policy.

The Foundation Payout Puzzle

One of the few regulations that all private foundations in the United States face is the requirement that they spend in grants and administrative expenses at least 5 percent of the value of their endowment. This number remains less a product of economic reasoning than three decades old political bargaining. The decision about how much to pay out in grants is a critical one because, across the entire foundation field, every one percent increase in the annual payout rate of all foundations translates into approximately $4 billion in new grant funds for the nonprofit sector. Given the stakes that are at issue, foundations must give serious thought to the question of how much should be given away today and how much should be saved for the future. Pulling at foundations as they deliberate over this complex issue are compelling arguments for a higher payout rate and a strong case for a low payout rate. This paper lays out the arguments on both sides of the payout debate. We then draw on a new dataset on foundation financial management to examine how a group of large and influential foundations has resolved the payout decision over the past two and half decades. After finding a remarkable convergence in foundation payout behavior, we explore several possible explanations for this behavior. We conclude by exploring policy alternatives to the long-standing 5 percent minimum payout rule and why a revisiting of this thirty-year old public policy is in order.

Payout Policy Irrelevance and the Dividend Puzzle

Why do firms make large cash payouts, given the tax advantages of retention? The dividend puzzle is based on the premise that low or near-zero payouts are optimal (although not uniquely so) in frictionless markets, hence should be strictly optimal when payouts are taxed. This logic reflects misunderstandings about the nature of payout policy irrelevance in frictionless markets and the implications of adding personal taxes to the standard finance model. In frictionless markets, all optimal policies require substantial payouts. Those with low or near-zero distributions are strictly sub-optimal, and are infeasible given rational expectations. Payout policy irrelevance does not carry over to general equilibrium, so it is inappropriate to conclude that many or most firms can make low payouts for extended periods. Imposition of personal taxes perturbs the frictionless equilibrium on the margin, but does not alter the implication that all optimal policies require substantial payouts. In short, the standard finance model (with or without taxes) implies, requires, and predicts the large payouts observed in the world.

Equity Valuation Using Multiples in the Emerging Market of the United Arab Emirates

This study offers some preliminary results about stock valuation in the emerging market of the United Arab Emirates. It examines the determinants of three valuation multiples in the period from 1996–2001, the price sales (PS), the price book value (PBV) and the price earnings (PE). Consistent with economic theory it is found that (1) the PS is positively significantly related to net profit margin; (2) the PBV is positively significantly related to return on equity; and (3) PE is positively significantly related to the payout ratio. The PE proved to be the most difficult to model because of the existence of outliers. These outliers can be explained by two extreme cases: Case 1, companies that have very low payout and growth rates, and still achieve the highest PE ratios; Case 2, companies that tend to pay far more in dividends compared to what they achieved in profit. Abu Dhabi Islamic bank seems to be trading at higher PE and PS multiples compared with commercial banks due to its clientele appreciation of...

Cash Dividends and Large Shareholder Expropriation in China

This paper finds several interesting pattern of cash dividend paying behavior in China. First, despite of low benefit of cash dividend to investors, listed companies pay cash dividends regularly. Second, there is an inertial pattern of paying cash dividend; those who pay do so regularly and those who do regularly offer lower payout ratio. Third, the inertia pattern weakens as time moves on. Fourth, the level of cash dividends declines and their paying pattern weakens as time moves on. We show that the common theories in the literature, the clientele effect theory, the signaling theory and the agency theory, cannot explain these phenomenon. The behavior of cash dividends payment in China is primarily driven by the market imperfection and the motive of large shareholder expropriation. The paper shows that firms with low shareholder concentration act more like a U.S. firm that pays dividend to convey information. Firms with intermediate shareholder concentration balance between expropriation by related party transaction and expropriation by cash dividend strategy. Firms with large shareholder concentration tend to expropriate small shareholders by cash dividend strategy.

Malpractice claims made against orthopedic and neurosurgical spine surgeons over a 21-year period

Daveed D. Frazier, MD, David Rojer, MD, John Brennan, MDM, Andrew Patterson, MD, New York, NY, USAIntroduction: We live in an increasingly litigious society. As physicians, malpractice claims are considered a simple cost of doing business. If we were more aware of the types and circumstances of cases involved in most malpractice cases, we might be able to avoid such cases in the future. To this end, we looked at data taken from the largest physician-owned professional liability carrier in the United States to determine if certain trends were notable in cases that were filed. We focused on claims related to spine surgery performed by orthopedic and neurosurgeons from a specific region in New York State. The identification of these trends might give us useful information for not only patient education but also for the way in which we practice medicine.Methods: All insurance claims made between 1975 and 1996 at Mutual Liability Medical Insurance Company were reviewed. Those claims made against spine surgeons in the districts of New York City, Long Island and upstate New York were isolated and provided the database for information obtained in this study. Charts on each case were reviewed and the information was tabulated to look for trends in malpractice claims. The information collected included district, insurance type, age of patient, sex of patient, hospital type (ie, teaching versus community), spine surgeon (ie, orthopedic versus neurosurgical), time of injury, anatomic area of injury, insurance company rating of case to be defensible or not defensible, procedure and allegation of wrong doing. This information was compared with national and regional data to provide trends in malpractice claims filed against spine surgeons.Results: There were a total of 176 cases filed against spine surgeons between 1981 and 1997. Of the cases filed, 75 were against orthopedic spine surgeons and 101 were against neurosurgeons. Sixty-two percent of orthopedic surgeons being sued had to give some monetary payout. There was no difference between orthopedic and neurosurgeons (p=.55, Fisher's exact test). If you were a spine surgeon and were sued, the average indemnity was $280,328 (median, $235,000). This indemnity did not differ between orthopedic and neurosurgeons (p=.599). In cases involving the cervical and thoracic spine, there is a trend for neurosurgeons to pay more if they are sued. In the cervical spine neurosurgeons paid $427,511, whereas orthopedic surgeons paid $250,833. In the thoracic spine neurosurgeons paid $511,063, whereas orthopedic surgeons paid $315,027. There is no significant difference in indemnity paid by orthopedic surgeons versus neurosurgeons in cases involving the lumbar spine: orthopedic surgeons paid $254,981, and neurosurgeons paid $239,488. Certain surgical procedures have a higher number of lawsuits filed. For orthopedic surgeons, the overwhelming procedure associated with lawsuits is lumbar laminectomies for discectomies, which accounts for nearly 55% of all cases filed against orthopedic surgeons. This is followed by scoliosis correction, which accounts for 11%. Lumbar laminectomies for discectomies account for 49% of all cases filed against neurosurgeons. This is followed by posterior cervical laminectomies, which account for 13% of cases; and lumbar decompression for stenosis, which accounts for 10% of cases filed against neurosurgeons. Of the cases that were filed, certain procedures are associated with a higher payout. For orthopedic surgeons, suits associated with lumbar laminectomies and fusion on average pay out $332,443, whereas lumbar laminectomies for discectomies on average pay out $260,167. For neurosurgeons, suits associated with posterior cervical laminectomies on average pay out $348,426, whereas lumbar laminectomies for discectomies on average pay out $217,946. More cases led to payout when filed upstate versus in New York City or Long Island: 75.6% versus 58.7% or 53.6% (p=.005). Although cases filed upstate had the highest rate of payout, they had the lowest median payout: $155,000 versus $625,000 or $275,000. Community hospitals had a significantly higher rate of payout versus teaching hospitals: 75.4% versus 48.4% (p=.000). When controlling for location of the hospital, this difference persisted. There is a trend toward lower payouts in community hospitals versus teaching hospitals (p=.098). For both neurosurgeons and orthopedic surgeons, the most common allegations being filed in malpractice cases are chronic pain postoperatively, postoperative infections, nerve damage, incorrect levels and dural tears.Discussion: A number of malpractice claims are associated with events that would typically be included in perioperative consent forms: chronic pain, infection, dural tear, nerve damage. Knowing these areas might help us to provide better informed consent to our patients in the future. Although the amount of indemnity paid in certain claims provides us with a number of different trends, the possible financial loss should not affect the way in which we practice medicine. Ultimately, our goals as physicians should not change: excellent patient care always.

Does Dividend Policy Foretell Earnings Growth?

Many market observers point to the very high fraction of earnings retained (or low dividend payout ratio) among companies today as a sign that future earnings growth will be well above historical norms. This view is sometimes interpreted as an extension of the work of Miller and Modigliani. They proved that, given certain assumptions about market efficiency, dividend policy should not matter to the value of a firm. Extending this concept intertemporally, and to the market as a whole, as many do, whenever market-wide dividend payout ratios are low, higher reinvestment of earnings should lead to faster future aggregate growth. However, in the real world, many complications exist that could confound the expected inverse relationship between current payouts and future earnings growth. For instance, dividends might signals managers' private information about future earnings prospects, with low payout ratios indicating fear that the current earnings may not be sustainable. Alternatively, earnings might be retained for the purpose of empire-building, which itself can negatively impact future earnings growth. We test whether dividend policy, as we observe in the payout ratio of the market portfolio, forecasts future aggregate earnings growth. This is, in a sense, one test of whether dividend policy matters. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low. This relationship is not subsumed by other factors such as simple mean reversion in earnings. Our evidence contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth. Rather, it is fully consistent with anecdotal tales about managers signaling their earnings expectations through dividends, or engaging in inefficient empire building, at times; either of these phenomena will conform with a positive link between payout ratios and subsequent earnings growth. Our findings offer a challenge to optimistic market observers who see recent low dividend payouts as a sign of high future earnings growth to come. These observers may prove to be correct, but history provides scant support for their thesis. This challenge is potentially all the more serious, as recent stock prices, relative to earnings, dividends and book values, rely heavily upon this expectation of superior future real earnings growth.

The Hidden Risks in Low Payouts

The Hidden Risks in Low Payouts

Risk Diversity Across Restaurants

This study examines how firm-specific financial characteristics affect the risk (i.e., from an investment-attractiveness perspective) of restaurants by examining the relationships among various firm-specific financial characteristics. The study considers the systematic and total risk of 52 restaurants from 1992 to 1995. The model used explains about half of the risk diversity across firms. The results of this analysis suggest that liquidity, dividend-payout ratio, return on assets, and growth in earnings before interest and taxes are important in explaining variation in risk across firms. In contrast, leverage seems to have little influence on market-based measures of risk. In general, high risk is likely to have an adverse effect on the cost of capital and can mean a high probability of insolvency. Though adequate liquidity is necessary for solvency, too much liquidity may suggest that available resources are not being invested in operating assets, which typically generate higher returns than cash or marketable securities. Firms with low payout ratios exhibit high risk, as low payout ratios may result in a high level of uncommitted internally generated funds. Managers ought to pay out earnings that cannot be profitably invested in the restaurants' operations. High operating returns are associated with low risk and tend to increase shareholder value. Aggressive and rapid growth, however, could increase risk by straining a firm's human resources and its ability to develop efficient controls and an effective internal structure.

Private payers of health care in Brazil: characteristics, costs and coverage.

The private sector is the predominant provider of health care in Brazil, particularly for inpatient services, and financing is a mix of public (through a prospective reimbursement system) and private. Roughly a quarter of the population has private insurance coverage, reflecting rapid growth in the past decade fuelled by the crisis in the public reimbursement system and the perceived deterioration of publicly provided care. Four major forms of insurance exist: (1) prepaid group practice; (2) medical cooperatives, physician owned and operated preferred provider organizations; (3) company health plans where employers ensure employee access to services under various types of arrangements from direct provision to purchasing of private services; and (4) health indemnity insurance. Each type of plan includes a wide variety of subplans from basic individual/family coverage to comprehensive executive coverage. The paper discusses the characteristics, costs and utilization patterns of all types of privately financed care, as well as the major problems associated with private financing: the limited package of benefits and low payout ceilings, inadequate consumer information and virtually no regulation.

The Market Valuation of Cash Dividends and the Tax Differential Theory of Dividend Policy: A Case Revisited

AbstractOne of the most controversial areas in finance concerns the relevance or irrelevance of dividend policy. Survey results reported by researchers indicate that corporate chief financial officers believe that dividend policy does affect stock prices. One factor that could cause dividend policy to matter is possible tax effects. However, although many maintain that tax treatment would favor low payout, Miller and Scholes argue that tax policy is irrelevant. The latest change in the tax code, which removed the lower capital gains tax rate, provides a unique opportunity to examine the relevance of tax policy alone. This study revisits the Citizens Utilities case, which was used by Long and Poterba. We conclude that the market for Citizens Utilities shares indicates that tax policy does influence value.

Crisis, bigger government, and ideological change: Two hypotheses on the ratchet phenomenon

From 1917 to 2012, donations by high-income households in the USA have moved inversely with income inequality. This association contradicts historical narratives and prevailing theory, both of which that imply that high-income households donate rising income shares when inequality increases. The negative correlation holds both unconditionally and after conditioning on other explanatory variables, at both the national and US state levels. Low payout ratios of foundations and endowed charities, combined with this observed relationship, imply that differences in charitable giving will tend to entrench, not reduce, inequality across places over time.