Payout Choice Research Articles

Geopolitical risk and corporate payout policy

In this study, we examine the effects of geopolitical risk on corporate payout policy. Exploiting a news-based index of geopolitical risk, we find that firms adopt a more conservative payout policy by reducing share repurchases in response to greater geopolitical risk, whereas the effects of geopolitical risk on cash dividends are insignificant. Further analysis suggests that cash flow uncertainty and financial distress risk are two potential channels through which geopolitical risk affects corporate payout policy. We also show that the effects of geopolitical risk on share repurchase are more pronounced for firms with greater exposure to product market competition and those facing higher threats of financial distress. Overall, our study emphasizes the implications of geopolitical risk for corporate payout choice.

Partial recall: differences between actual and self-reported annuitization decisions in Sweden

AbstractThis paper reports the results from a large telephone survey of 1,000 retiring white-collar workers in Sweden. Shortly before the interview, the participants at age 65 had a choice of receiving a life annuity by default or opting for a fixed-term payout, with a minimum payout length of 5 years. Large monetary amounts were at stake in the payout decision of the survey participants; the average monthly pension payment under the life annuity amounted to US $280. Comparing the survey responses with administrative records on actual payout choices, I find that a majority of retiring white-collar workers fail to recall their payout decision. The recollection rate is much lower among annuitants (those who chose the default option); only 40% of the annuitants accurately recalled their payout decision compared to 77% of those who opted for a fixed-term payout. Beyond payout choice, few individual characteristics predict successful recollection.

Determinants of payout choice between open market repurchase, tender offer repurchase and special dividends

The paper aims to identify the variables contributing to special payouts considering open market repurchase, tender offer repurchases, and special dividends. A multinomial logit model has been used...

Determinants of the choice between share repurchases and dividend payments

Increased share repurchase activity has raised renewed concerns as to whether the positive share price effect generally associated with share repurchase announcements is motivating companies to repurchase shares rather than to invest in future growth. This study focused on ascertaining the significant determinants of the choice between share repurchases and dividend payments to establish whether short-term share price manipulation affects the payout choice in South Africa. The significant determinants for the overall sample were shareholder heterogeneity, the size of the distribution and the level of company undervaluation. The significance of these variables were confirmed when disaggregating the data into sector and size categories. Additionally to this, the agency cost and history of dividend payment determinants were identified as significant determinants in the disaggregated analyses. Short-term share price manipulation was not found to be the driver of the payout choice.

The effects of the 2006 SEC executive compensation disclosure rules on managerial incentives

In 2006, the SEC amended the disclosure requirements for executive compensation and stock ownership. This paper examines the effects of these amendments on (1) the association between equity-based executive incentives and firm payout choice, and (2) the association between executive compensation and earnings management. We find that after the effective date of the SEC rules, the positive associations between executive stock option holdings and firm open-market repurchases, and between executive shareholdings and firm dividend payouts, have weakened. In addition, the positive associations between bonus and discretionary accruals, between bonus and real earnings management, and between equity compensation and real earnings management, have decreased. In general, these findings are consistent with the notion that the 2006 SEC disclosure rules lowered management's self-interested actions by mitigating the information asymmetry between investors and managers.

Executive Remuneration and the Payout Decision

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper investigates whether corporate payout policies (dividends, share repurchases, a combination of dividends and share repurchases, and full earnings retention) are set by CEOs who intend to maximize their personal wealth.Research Findings/InsightsFor all listed UK companies we study whether the payout channel choice is affected by investor sentiment, taxation, major shareholder ownership, and in particular the CEO's compensation package. The payout choice has an immediate effect on the value of the CEO's stock options and restricted stock, as anticipated dividends drive down the value of his equity‐based pay (if it is not dividend‐protected), and share repurchases have a positive impact on pay. By means of a quantile regression approach and nested logit models, we find that CEOs adopt a payout policy that increases the value of their equity‐based pay.Theoretical/Academic ImplicationsTraditional research shows that corporate payout policies cater to shareholder clienteles who have preferences for specific types of payout induced by e.g. differences in taxation on dividends and capital gains, or market sentiment. We demonstrate that it is a CEO's personal wealth as reflected by his compensation package rather than shareholder preferences that has the strongest impact on the payout policy.Practitioner/Policy ImplicationsThis research encourages firms/remuneration consultants to make top management's remuneration packages ‘dividend‐neutral’, in other words to remove the negative impact of the dividends on pay such that the payout and payout channel choice will not be influenced by the CEO's wealth. In addition, this research encourages shareholders to contemplate whether the payout is beneficial for them and to vote on the proposed payout policy at the annual general meetings.

Financial Flexibility, Risk Management, and Payout Choice

Financial Flexibility, Risk Management, and Payout Choice

Analysis of payout choice from individual deferred annuities in Korea

AbstractWe analyse annuitization rates by policyholders with individual deferred annuities in Korea to assess the impact of different tax policies on payout decisions between 2008 and 2011. Under the Korean tax system, two types of individual deferred annuities were sold: qualified (taxed for lump sums) and non-qualified (tax free for lump sums). Our results show that policyholders with qualified contracts are more likely to select a life annuity option than a lump-sum distribution, compared to policyholders of non-qualified contracts. This suggests that policyholders are more likely to use non-qualified contracts as savings vehicles than as longevity insurance.

Executive Remuneration and the Payout Decision

We analyze the payout channel choice of listed UK firms and examine whether the choice between dividends, share repurchases, a combination of payout channels, or complete earnings retention is affected by investor sentiment, taxation, major shareholder ownership, and in particular the CEO’s compensation package. The payout choice can have an immediate effect on the value of the CEO’s stock options and restricted stock, whereby anticipated dividends drive down the value of her equity-based pay if it is not dividend-protected whereas share repurchases may have a positive impact. We use a quantile regression analysis to examine various payout scenarios as well as a nested logit model which studies payout choice conditional on changing payout levels. We find that it is the CEO’s personal wealth as reflected by her compensation package rather than shareholder preferences which has the strongest impact on the firm’s payout policy.

Financial Flexibility, Risk Management, and Payout Choice

Both risk management and payout decisions affect a firm's financial flexibility—the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.

Financial Flexibility, Risk Management, and Payout Choice

Both risk management and payout decisions affect a firm’s financial flexibility — the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.

The Effect of Shareholder Taxes on Corporate Payout Choice

abstractThis study investigates whether the difference in individual shareholder tax rates between dividend income and capital gain (the dividend tax penalty) affects a firm's choice between distributing funds to shareholders through dividends or share repurchases. The results of this study suggest that, in periods in which the dividend tax penalty increases, firms are more likely to distribute funds to shareholders through share repurchases as opposed to dividends. The results also indicate that the relation between the dividend tax penalty and corporate payout choice is affected by the types of shareholders who own stock in the firm. As tax-disfavored institutional ownership increases and the dividend tax penalty increases, firms are more likely to repurchase shares as opposed to distributing dividends. In contrast, as tax-favored institutional ownership increases and the dividend tax penalty increases, firms are less likely to repurchase shares as opposed to distributing dividends. As senior managerial share ownership increases and the dividend tax penalty increases, firms are more likely to make distributions to shareholders in the form of share repurchases.

Financial Flexibility, Performance, and the Corporate Payout Choice*

This study examines the effect of financial flexibility and the level and certainty of operating performance on the choice to change dividends, pay special dividends, and repurchase shares. Firms that increase payouts have excess financial flexibility and exhibit positive concurrent income shocks and decreases in income volatility, but there is limited evidence of subsequent performance improvements. The results are opposite for firms that cut dividends. Thus, the decision to alter payout levels appears to convey information about contemporaneous income and changes in operating risk.