Payout Decisions Research Articles

The Dynamics of Investment, Payout and Debt

We develop a dynamic agency model of a public corporation. Managers underinvest because of risk aversion. They smooth rents and payout. They do not exploit interest tax shields fully. The interactions of investment, debt, and payout decisions can change drastically depending on managers’ preferences. Managers with power utility set investment, debt, and payout proportional to the firm’s net worth, generating a constant (possibly negative) net debt ratio. With exponential utility, investment decisions are separated from decisions about debt and payout. More profitable firms become cash cows, and less profitable firms accumulate debt, as in a pecking-order model. Received July 9, 2015; editorial decision January 30, 2017 by Editor Itay Goldstein.

Stock Market Investors’ Guide to Corporate Dividend Policy: Evidence from Pharmaceuticals and Chemicals Industries in Bangladesh

Dividend policy has been an important component in the arena of financial literature and providing evidence that dividend payout decisions are affected by various factors. Numerous studies have been conducted so far on corporate dividend policy in Bangladesh. The pharmaceuticals and chemicals industries of Bangladesh offer a lot of investment panorama for the retail investors. This research has been an endeavor to determine the factors affecting the dividend policy of these promising industries, and guide the investment decisions of the equity investors. In this attempt, this study is also a unique one to incorporate the chemicals industry along with the pharmaceuticals industry as both the industries constitute the 'pharmaceuticals and chemicals sector' listed in the stock market of Bangladesh. The study is a quantitative one based on secondary data. It comprises of different statistical analyses such as descriptive statistics, correlation matrix and multiple linear regression analysis, etc. Firm size, growth, liquidity, profitability, last year's dividend and P/E ratio are used as dependent variables. Besides, ownership structure, firm age, market share, and risk are used as control variables. The study explores that firm size has significant negative and last year’s dividend has significant positive relationship with dividend payout. However, dividend payout does not depend on firm growth, liquidity, profitability and P/E ratio of a firm. The research outcome may have important implications for the improvement of investors' perceptions, which may assist them in their investment decisions in the researched industries. Certainly more work lies ahead to add to explanations for why some of the factors affect the dividend policy of the industries, while others have no significant impact thereon.

Reducing agency conflicts through bank dividend payout decisions: the role of opacity and ownership structure

ABSTRACTWe empirically examine whether banks’ dividend decisions are influenced by their degree of opacity and ownership structure. We find that banks with concentrated ownership structure pay lower dividends when they have high degrees of opacity, in line with the hypothesis that majority shareholders pay lower dividends to extract higher levels of private benefits. We do not observe such expropriation behaviour from managers in widely held banks. Further analysis shows that higher levels of shareholder protection and stronger supervisory regimes help to constrain opportunistic behaviour of majority shareholders. Our findings have critical policy implications for the Basel 3 implementation of restrictions on dividend payouts.

Sticky Dividends: A New Explanation

This paper investigates dividend dynamics using a generalized partial adjustment model. A novel feature of our model is that it allows managers to consider the earnings history via adaptive expectation formation of future earnings for their payout decisions. We show that firms adjust dividends to their target payouts much faster than previously documented. We also show that target dividends are predominantly driven by firm-specific effects, and tend to become significantly more stable when managers form future earnings prospects adaptively. Thus, sticky dividends could arise from their attempts to conform to the target payouts, thereby leading to higher dividend adjustment speeds.

FACTORS INFLUENCING DIVIDEND PAYOUT DECISION OF FINANCIAL AND NON-FINANCIAL COMPANIES LISTED ON NAIROBI SECURITIES EXCHANGE

Purpose: The purpose of this study was to examine the factors influencing dividend payout decision of financial and non-financial companies listed on Nairobi securities exchange.Methodology: The study conducted a census on 33 financial and non-financial firms listed on the NSE consistently since 2003 to 2012.Panel data was analyzed using random effects Tobit and random affects probit models. The findings indicated that four variables; financial leverage, business risk, profitability and Earnings per share significantly influenced the amount of dividend paid.Results: The findings indicated that four variables; financial leverage, business risk, profitability and Earnings per share significantly influenced the amount of dividend paid. Based on the findings, the study concluded that EPS, financial leverage and business risk play a key role in making the decision to pay or not to pay dividends. Earnings per share influences the decision to pay positively while both financial leverage and business risk influences the decision to pay dividends negatively.Unique contribution to theory, practice and policy: The study also recommends that managers may use the study findings when making the dividend payout policies since they will be given useful information regarding which factors they may consider when determining the dividend payouts

Effect of Working Capital on the Dividend Pay-Out by Firms Listed at the Nairobi Securities Exchange, Kenya

Managers strive to maximise shareholders wealth by making rational financing decisions regarding optimal working capital which would maximise the value of the firm. In an attempt to maximise the value of the firm managers employ sound management techniques to ensure that there is neither excess nor inadequate investment in current assets so as to strike a balance between liquidity and profitability. The determination of dividend payout is influenced by the working capital management of a firm but the extent to which working capital affects the dividend payout still remains a puzzle since most empirical studies conducted have reported inconsistent results. It is in this context that the study was set out to determine the effect of working capital on dividend payout of a firm. The objectives of the study were; to determine the effect of cash management, inventory management and account receivables on the firms’ dividend payout decisions. The study employed causal research design on a target population of 61 firms listed at the NSE. Purposive sampling was used to select 30 firms which consistently paid dividends from the year 20011 to 2015. Data was collected from the audited annual reports and financial statements of individual firms sourced from the NSE. Data analysis was done using descriptive and inferential statistics. Statistical hypothesis was tested using t-test at 5% margin of error. Normality of data, homoscedasticity and autocorrelation assumptions of the regression model were tested using descriptive statistics, scatter plots and Durbin Watson test. Multiple linear regression model was used to analyse the cause-effect relationship between independent variables and dependent variable. The overall model was found to be significant with F= 60.136, P value < 0.05. The study revealed that cash management with a P value < 0.05 has a positive effect on dividend payout. Inventory management with associated P value of 0.010 have a positive effect on dividend payout decisions. Account Receivables with a P value < 0.05 has a positive effect on dividend payout decisions. The study recommends that firms should ensure that cash is well managed, implement policies that ensure debtors pay on time, and inventory is well managed so as to increase the firms’ dividend payout. The results would provide information to managers to determine an optimal dividend payout that would maximise the company’s stock price and thus lead to maximisation of shareholders wealth.

Agency dynamics in corporate finance

We describe a framework for analyzing the dynamics of investment, borrowing, and payout decisions by public corporations. We assume that managers act entirely in their own long-run interests, subject to a governance constraint that limits their rents. Risk-neutral managers invest to maximize value but wait too long to disinvest. Efficient disinvestment can be forced by the right level of debt or by takeovers. Risk-averse managers underinvest; they do not waste free cash flow, because the governance constraint is binding. They smooth rents and consequently payout, so that changes in borrowing become a shock absorber for volatility of operating income. We obtain the Lintner model of payout if risk-averse managers have a utility function with habit formation. We show how to adapt the dynamic framework to analyze several other issues, including the effects of asymmetric information. We show that Lintner-style payout smoothing can also arise when risk-neutral managers are better informed than outsiders.

Does religion matter to dividend policy? Evidence from Buddhism and Taoism in China

Purpose The purpose of this paper is to examine the relation between Buddhism/Taoism and dividend payout decisions among Chinese listed firms during 2003-2013. Design/methodology/approach The authors include all Chinese A-share listed stocks in their sample during 2003-2013 and use a multiple regression method to conduct their analyses. Findings Their findings suggest that firms in regions with high influence of Buddhism and Taoism lean toward having high dividend payouts. The results are robust to a battery of alternative specifications in dividend payout, religiosity measures, research methods and dividend regulation regimes. Originality/value They show that the religions of Buddhism/Taoism play a role in determining dividend payout, complementing other informal institution studies of dividend policy. They complement the literature by providing insights into the impact of Buddhism and Taoism on corporate behaviors beyond immoral or unethical practices. They are able to relate specific doctrinal tenets of Buddhism and Taoism to corporate behavior rather than using only the general moral and ethical guidelines of religiosity.

Agency Dynamics in Corporate Finance

We describe a framework for analyzing the dynamics of investment, borrowing, and payout decisions by public corporations. We assume that managers act entirely in their own long-run interests, subject to a governance constraint that limits their rents. Risk-neutral managers invest to maximize value but wait too long to disinvest. Efficient disinvestment can be forced by the right level of debt or by takeovers. Risk-averse managers underinvest; they do not waste free cash flow, because the governance constraint is binding. They smooth rents and consequently payout, so that changes in borrowing become a shock absorber for volatility of operating income. We obtain the Lintner model of payout if risk-averse managers have a utility function with habit formation. We show how to adapt the dynamic framework to analyze several other issues, including the effects of asymmetric information. We show that Lintner-style payout smoothing can also arise when risk-neutral managers are better informed than outsiders.

Dynamic agency and investment theory with time-inconsistent preferences

We incorporate managers’ time-inconsistent preferences into the DeMarzo et al. (2012) model of dynamic agency and the q theory of investment. Our model provides an alternative explanation for underinvestment from the perspective of managers’ time inconsistency. It also shows that firms prefer delaying a cash payout due to managers’ time-inconsistent preferences, and the corresponding distorted investment and payout decisions significantly decrease a firm’s average q and marginal q.

Interrelation between payout and financing decisions: evidence from emerging markets

Nikita Konstantinovich Pirogov - HSE.&#x0D; E-mail: npirogov@hse.ru&#x0D; Artem Eduardovich Anilov - HSE.&#x0D; E-mail: tema_anilov@mail.ru&#x0D; Financing and payout decisions generally affect company’s economic performance: they have impact (both directly and indirectly) on the free cash flow and, thus, on company’s and shareholders’ value. Search for optimal capital structure and optimal payout policy strategy that are likely to maximize shareholders’ utility resulted in the papers, dedicated to determinants of capital structure and payout policy. In such papers, one of the policies is usually treated as a determinant for another one. This bound does not let researchers to make some conclusions about existence or absence of interrelation between payout and financing choices. To capture this interrelation, simultaneous regression analysis should be performed. Researchers, though, cannot come up with unified conclusion about the existence and direction of such interrelation.The absence of certain results as well as low level of research done on emerging markets make this topic rather relevant.The results of recent research on the interrelation between payout and financing decisions are discussed in this paper. We also develop an econometric model that allows us to check the existence of interrelation in emerging markets and to compare the results to those obtained from developed markets.The article contributes to the existed literature in the following directions: first, two debt variables are taken into account (total and long-term debt) as well as two payout policy variables (total payout and dividend payout). Second, macroeconomic variables are controlled. Third, the results obtained from the companies from emerging countries are compared to those obtained from developed markets.

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.

Payout differences between family and nonfamily listed firms: a socioemotional wealth perspective

Purpose The objective of this study is to explain family firm payout decisions based on socioemotional wealth (SEW) considerations. Design/methodology/approach A sample of publicly listed Canadian companies is examined for the period from 2003 to 2008. Distinguishing family firms from nonfamily firms, a Probit regression is used to analyze the likelihood of making a payout. For payout firms, regressions are used to analyze the relationship between payout level (dividends and share repurchases) and payout mix and family firms. Findings Results indicate that family firms are more likely to make a payout than nonfamily firms. Among payout firms, the level of payout among payout firms is lower for family firms than for nonfamily firms and their portion of payout in the form of dividends is higher. Lone founder family firms have a lower likelihood of making payouts than other family firms. However, among payout firms, they pay out more than other family firms and have a smaller percentage of their total payout in dividends than other family firms. Research limitations/implications Results are impacted by the definition of what constitutes a family firm. Family ownership was used as a proxy for the underlying SEW considerations. Future research could involve interviews with family firm representatives to investigate the relative importance of SEW considerations in their payout decisions. Originality/value In providing an alternative theoretical framing of family firms’ payout policies, the study suggests that payout differences between family and nonfamily firms may be driven in part by SEW considerations.

"IPO Exit Risk: The Timing and Sequencing of Innovation, Investment, Financing and Payout Decisions"

Barely one sixth of U.S. initial public offerings (IPO) survive a median listing life of 5.73 years. Prior literature suggests a variety of financial and management variables as explanatory factors...

Reducing Agency Conflict through Bank Dividend Payout Decisions: The Role of Opacity and Ownership Structure

We empirically examine whether banks’ dividend decisions are influenced by their degree of opacity and ownership structure. We find that banks with concentrated ownership structure pay lower dividends when they have high degrees of opacity, in line with the hypothesis that majority shareholders pay lower dividends to extract higher levels of private benefits. We do not observe such opportunist behavior for widely held banks. These results suggest that there exist other corporate mechanisms in widely held banks that can induce insiders to select payout policies that reduce agency conflict in a context of high degrees of opacity. Nevertheless, the effectiveness of these mechanisms is reduced in banks with controlling shareholders. Further analysis shows that higher levels of shareholder protection and stronger supervisory regimes help to constrain opportunistic behavior of majority shareholders. Our findings have critical policy implications for the Basel 3 implementation of restrictions on dividend payouts.

"Payouts, Option Pay, and Risk-Taking: The Unintended Consequences of Payout Decisions."

Drawing on insights from agency theory and the Behavioral Agency Model (BAM), we hypothesize that CEOs’ decisions to pay out, in the form of dividends and stock options, can affect their own incent...

Signaling mechanism of corporate payout policy: A case of Indian firms

Article history: Received July 5, 2015 Received in revised format August 16 2015 Accepted January 6 2016 Available online January 11 2016 Historically, cash dividends are the most important form of payout policy; however, they have been losing popularity relative to share repurchases. This paper examines the signaling effect of the payout decisions namely, cash dividends and share repurchases by BSE 500 index companies. It attempts to uncover the underlying forces behind the firm’s choices of payout policy in the Indian context. Using the standard ‘Event Standard Methodology’, a strong case of positive signaling is reported in case of repurchase announcements vis-a-vis cash dividend announcements. It is observed that cash dividends are not perceived by investors as positive signals as they prefer their earnings to be retained by the companies for growth prospects. In case of share repurchases, the existence of undervaluation, signaling and wealth transfer hypotheses is reported, consistent with the fact the share repurchases are welcomed by the Indian companies. The results would provide insights into the economics of the choice between cash dividends versus share repurchases as payout mechanism adopted by the sample companies. The findings would also be useful to the academia as well as industry in understanding the payout practice and the extent to which the Indian managers use the assumptions, models and decision rules regarding payout. Growing Science Ltd. All rights reserved. 6 © 201

Is corporate payout taxation a long run phenomenon? Evidence from international data

This paper examines whether dividend and capital gains taxation influences corporate payout policy using the country level data of 21 countries in panel versions of time series models. We find that dividend relative to capital gains tax penalty is cointegrated with corporate payouts (dividends and share repurchases) i.e. corporate payout taxation may be a long run phenomenon. Further, the cointegrating vector estimates are largely consistent with the traditional view of dividend taxation whereby the tax penalty discourages dividends, while the estimates give limited support to the premise that firms substitute dividends for share repurchases in response to an increase in dividend tax penalty. Long run causality also operates between the tax penalty and payouts in the error correction models. Additionally, dividend tax appears to be more influential than capital gains tax on dividend payout decisions. Lastly, taxation affects dividends more significantly in countries with high investor protection.

Foreign Institutional Ownership and the Valuation Effect of Investment and Payout Decisions

We study the effect of foreign ownership on firm valuation through strategic corporate decisions related to investment and payouts. Using data from Japan, we find evidence that foreign institutional investors lead to higher firm value through better and efficient investment and payout decisions. Our results indicate that through increased monitoring, foreign investors mitigate the possibility of sub-optimal investments and unnecessary payouts by the management. We also find that firms with increased foreign ownership use their cash reserves in ways that significantly compliments the operating performance. Furthermore, our results also support the conjecture of a recent decline in the influence of Japanese main banks on firm’s strategic decisions.

Optimal contract theory with time-inconsistent preferences

This paper incorporates managers' time-inconsistent preferences into the classical DeMarzo and Sannikov (2006) contract model to study corresponding impacts on the optimal contract, corporate financial policies, and the optimal capital structure. The extended model shows that the impatience of the time-inconsistent agent has positive effects on the optimal payout decision which is opposite to DeMarzo and Sannikov (2006) and consequently provides a guideline to tailor the contract between investors and the agent. It also shows in the optimal capital structure, the total debt capacity shrinks with the degree of the agent's time inconsistency, and the long-term one shrinks more. In addition, our model predicts that the agent's time inconsistency not only imposes significant limits on the use of long-term debt but also has great effects on firms' capital structures. Thus our finding can potentially explain observed cross-sectional differences in firms' capital structures.