Total Payout Research Articles

Causes and Costs of a Decade of Litigation Following Emergency Appendectomy in England

There has been recent interest in the delayed and nonoperative management of appendicitis. The present study assessed the causes and costs of litigation against surgeons following emergency appendectomy, with an emphasis on claims relating to preoperative management. Data were obtained from the English NHS Litigation Authority for claims relevant to appendectomy between 2002 and 2011. Two authors independently extracted data and classified it against predetermined criteria. Successful litigation occurred in 66 % of closed cases (147/223) with a total payout of £8.1 million. There were 24 claims against organizational operating room delays (9 % of total) and 27 against delayed diagnosis (10 %), with respective success rates of 70 and 68 %. From 21 claims relating to damage to fertility, nine were due to either delayed diagnosis or organizational operating room delays. Misdiagnosis was the second most common cause for litigation (16 %), but it had the lowest likelihood of success (49 %). Faulty surgical technique was the most common reason for litigation (39 %), with a 70 % likelihood of success. Of eight claims related to fatality, one was due to unacceptable preoperative delay leading to preventable perforated appendicitis. The overall highest median payouts were for claims of damage to fertility (£52,384), operating list delays (£44,716), and delayed diagnosis (£42,292). There were significant medicolegal risks surrounding delays related to access to operating lists and diagnosis. Whereas future evidence regarding the safety of delayed appendectomy may provide scientific defense against these claims, the present study provides evidence of the current medicolegal risk to surgeons following delayed treatment of appendicitis.

Managing cellular congestion using incentives

Mobile data traffic is expected to grow exponentially in the next few years due to the explosive growth of mobile web and video traffic on smartphones. Wireless operators have invested heavily to make infrastructural improvements by installing new cell towers and offloading cellular data traffic to Wi-Fi to resolve congestion. They are also exploring the use of behavioral and economic interventions to manage congestion. To understand the role of interventions, we distributed smartphones to students at Purdue University, loaded with applications to perform monitoring and location tracking with user consent. We conducted two experiments: first with 14 phones of one type, then with 30 phones of two types. Wi-Fi traffic and cellular network data usage were collected and analyzed to characterize and quantify the changes in usage behaviors; the second experiment also captured location data during compliance/non-compliance to incentive messages. The trial seeks not only to experiment with incentives and disincentives to observe their effectiveness, but also to understand current mobile broadband and Wi-Fi usage behaviors in a campus environment. Our results indicate a high level of compliance with economic incentives and disincentives. Detailed analysis further showed correlation with two psychological measures of each user (agreeableness and neuroticism). In addition, we found schemes with probabilistic payments of higher incentive amounts getting more positive results compared to schemes with definite payments with lower incentive amounts, despite similar total payout.

Expropriation of minority shareholders and payout policy

This paper studies the payout policy of Italian firms controlled by large majority shareholders (controlled firms). The paper reports that a firm's share of dividends in total payout (dividends plus repurchases) is negatively related to the size of the cash flow stake of the firm's controlling shareholder and positively associated with the wedge between the controlling shareholder's control rights and cash flow rights. These findings are consistent with the substitute model of payout. One of the implications of this model is that controlled firms with weak corporate governance set-ups, in which controlling shareholders have strong incentives to expropriate minority shareholders, tend to prefer dividends over repurchases when disgorging cash.

A Lintner Model of Payout and Managerial Rents

ABSTRACTWe develop a dynamic agency model in which payout, investment, and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.

Corporate Payout Policy in Dual-Class Firms

Using a sample of U.S. firms from 1995 to 2002, we examine corporate payout policy in dual-class firms. The expropriation hypothesis predicts that dual-class firms pay out less to shareholders because entrenched managers want to maximize the value of assets under control and the private benefits associated with it. The pre-commitment hypothesis predicts that dual-class firms pay out more to shareholders because firms use corporate payouts as a pre-commitment device to mitigate agency costs. Our results support the pre-commitment hypothesis. Dual-class firms have higher cash dividend payments and total payouts, and use more regular cash dividends rather than special dividends or repurchases, compared to single-class firms. Dual-class firms with severe free cash flow problems and few growth opportunities rely even more on corporate payouts as a pre-commitment mechanism. We also rule out the alternative hypothesis that dual-class firms pay out more because super-voting shareholders lack the ability to generate home-made dividends by selling shares since super-voting shares are non-tradable.

Corporate Payout Policy and Managerial Overconfidence

We analyze the relation between managerial overconfidence and corporate payout policy. We predict that overconfident managers perceive their firm's equity to be undervalued and therefore prefer share repurchases over dividends when distributing cash to shareholders. Using data from S&P 1500 firms between 1992 and 2010, we employ a difference-in-difference methodology around CEO turnover and find that firms reorganize their payouts towards a greater fraction of share repurchases when the incoming CEO is overconfident relative to rational incoming CEOs. Overconfident CEOs also increase the total amount of share repurchases when measured in terms of total assets while cash dividends increase by a lower amount compared to rational managers. Total payouts are unaffected. This is a surprising result because existing evidence suggests that overconfident CEOs prefer to fund investment projects internally - and thus would be expected to retain excess cash.

Corporate Payout Policy and Changes in Housing Prices

We study how corporate payout policy responds to changing investor tastes for non-dividend over dividend paying stocks following an increase in housing prices. Exploiting the crossregional dispersion in housing prices within the U.S. market, we find a significant negative effect of growth in housing prices on local firm’s propensity to pay and to initiate dividends, and on its dividend yield, payout ratio as well as total payout. Such housing effect is particularly strong for small firms, young firms, volatile firms, and low profitability firms. Our findings are insensitive to the choice of model specification and estimation method. They are also robust to controlling for several firm-specific variables, macro-economic variables, market sentiment, and dividend premium (proxy for dividend catering). In contrast to recent criticisms against catering theory, we find that dividend premium loads positively at state level. Moreover, we report weaker market reactions to dividend changes when local housing prices increase. This study is the first to establish a relationship between growth in housing prices and corporate policy decisions. It also introduces geography as a determinant of payout policy.

Liquidity, Ownership Structure, and Market Share Repurchases: Evidence from Japan

Our empirical results show that the companies with higher market liquidity and shorter investment horizons by their shareholders tend to initiate market share repurchases. Such companies also have a higher value and percentage of repurchases with respect to total payout. Japanese companies’ unique shareholder ownership structure should have an influence on payout policies.

Short-term termination without deterring long-term investment: A theory of debt and buyouts

The option to terminate a manager early minimizes investor losses if he is unskilled. However, it also deters a skilled manager from undertaking efficient long-term projects that risk low short-term earnings. This paper demonstrates how risky debt can overcome this tension. Leverage concentrates equityholders' stakes, inducing them to learn the cause of low earnings. If they result from investment (poor management), the firm is continued (liquidated). Therefore, unskilled managers are terminated and skilled managers invest without fear of termination. Unlike models of managerial discipline based on total payout, dividends are not a substitute for debt—they allow for termination upon non-payment, but at the expense of investment since they do not concentrate ownership and induce monitoring. Debt is dynamically consistent as the manager benefits from monitoring. In traditional theories, monitoring constrains the manager; here, it frees him to invest.

Variable annuities: A unifying valuation approach

Life annuities and pension products usually involve a number of guarantees, such as minimum accumulation rates, minimum annual payments or a minimum total payout. Packaging different types of guarantees is the feature of so-called variable annuities. Basically, these products are unit-linked investment policies providing a post-retirement income. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type ‘x’), include minimum benefits both in the case of death and survival. In this paper we propose a unifying framework for the valuation of variable annuities under quite general model assumptions. We compute and compare contract values and fair fee rates under ‘static’ and ‘mixed’ valuation approaches, via ordinary and least squares Monte Carlo methods, respectively.

Independent directors and the propensity to pay dividends

Using data from 944 public companies in 2006, I examine how a firm's propensity to pay dividends is related to (i) board independence and (ii) independent directors' tenure, number of board seats (busy) and equity incentive compensation. After controlling for the effects of traditional economic, CEO entrenchment and ownership determinants of the propensity to pay dividends, I find evidence of a positive association between the propensity to pay and (i) board independence and (ii) director tenure, and a negative association between the propensity to pay and (i) busy directors and (ii) greater equity incentive compensation in the director pay structure. I find consistent results when the decision is to pay cash dividends or repurchase shares. In further tests, I find that equity incentive compensation in the independent director pay structure is the most pervasive determinant across other dividend measures such as dividend payout, total payout and repurchases. Overall, the findings suggest that the characteristics of independent directors are important determinants of the payout policy. The results also suggest that future corporate governance research could benefit from incorporating characteristics of independent directors rather than limiting governance measures to board independence especially when recent empirical evidence (Linck et al., 2008, 2009) shows convergence, and therefore, narrowing variation in the proportion of outsiders and insiders on a board.

Variable Annuities: A Unifying Valuation Approach

Life annuities and pension products usually involve a number of guarantees, such as minimum accumulation rates, minimum annual payments or a minimum total payout. Packaging different types of guarantees is the feature of so-called variable annuities. Basically, these products are unit-linked investment policies providing a post-retirement income. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type 'x'), include minimum benefits both in case of death and survival. In this paper we propose a unifying framework for the valuation of variable annuities under quite general model assumptions. We compute and compare contract values and fair fee rates under 'static' and 'mixed' valuation approaches, via ordinary and least squares Monte Carlo methods, respectively.

Stock Repurchases and Executive Compensation Contract Design: The Role of Earnings per Share Performance Conditions

ABSTRACT: We examine the link between firms’ stock repurchase activity and the presence of earnings per share (EPS) performance conditions in executive compensation contracts. Findings reveal a strong positive association between repurchases and EPS-contingent compensation arrangements. Further analysis suggests net benefits to shareholders from this association. Specifically, repurchasers experience larger increases in total payouts; the positive association between repurchases and cash performance is more pronounced for firms with EPS targets in the presence of surplus cash; undervalued firms with EPS targets are more likely to signal mispricing through a repurchase; and repurchasers with EPS conditions are associated with lower abnormal accruals. We find no evidence that EPS-driven repurchases impose costs on shareholders in the form of investment myopia.

Do Not Wake Sleeping Dogs: Payout Policies in Founding Family Firms

This article examines founding family influence on pay-out policies for Swiss listed firms over the period 2003-2010. We find that founding family firms have higher dividends and total pay-outs than non-family firms. There is no significant difference between stock repurchases for the two types of firms. We show that specific firm characteristics such as active involvement of family members, the presence of only one or multiple family members or the existence of a second blockholder play an important role for pay-out policies in family firms. Firms using control enhancing mechanisms do not have significantly lower pay-outs. We propose three possible explanations for the observed pay-out policies: private benefit extraction, reputation building, and family legacy. Our findings appear to be consistent with the reputation building hypothesis.

Patterns in payout policy and payout channel choice

We study the decision to distribute funds as well as the choice of the payout channel (i.e. dividends, repurchases, or both). Our analysis of the payout policy of UK firms demonstrates that the importance of share repurchases is increasing, but dividends still constitute a vast proportion of the total payout. We document that there is a relation between the presence of blockholders and the choice of the payout channel. We find that payout decisions are influenced by directors’ liquidity needs but are not consistent with the agency theory of payout. We also reject the tax-clientele explanation for payout choices.

The contribution of stock repurchases to the value of the firm and cash holdings around the world

Using corporate payout data from 33 economies, this study investigates the contribution of stock repurchases to the value of the firm and cash holdings in different country-level investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection. We also report that dividends contribute approximately 60% more to firm value than repurchases in countries with weak investor protection. Furthermore, as the proportion of repurchases in total payouts increases, the marginal value of cash increases in countries with strong investor protection, whereas it declines in countries with weak investor protection. In a poor investor protection environment, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that stock repurchases are less effective than dividends in mitigating agency problems associated with free cash flow in countries with poor investor protection.

Portfolios Weighted by Repurchase and Total Payout

Portfolios weighted by fundamental measures of company size, such as assets, dividends, sales, earnings, and employees, have recently attracted a lot of attention. Pioneering research has showed that these fundamental value–weighted portfolios, especially dividend-weighted portfolios, can achieve better mean returns and better Sharpe ratios than could be attained with the traditional market value– weighted portfolio. In this article, the authors examine three portfolios weighted by the additional fundamental measures of firm size—share repurchases, total payout, and earnings retention—and find that the repurchase-weighted portfolios and total payout–weighted portfolios have higher excess returns and higher Sharpe ratios than the other fundamental value–weighted portfolios, including the dividend-weighted portfolio. The repurchase-weighted portfolio shows a positive and statistically significant alpha of 2.77% after controlling for the Fama–French factors (market, size, and book-to-market) and Carhart’s momentum variable. The total payout–weighted portfolio also has a positive and significant alpha, albeit smaller than that of the repurchase-weighted portfolio. <b>TOPICS:</b>Portfolio construction, security analysis and valuation

A Lintner Model of Payout and Managerial Rents

We develop a dynamic agency model where payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout in order to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target-adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.

The Contribution of Stock Repurchases to the Value of Firm and Cash Holdings Around the World

Using corporate payout data from 33 economies around the world, this study investigates the relations among stock repurchases, dividends and firm value (as well as cash value) under different investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection, and that dividends contribute more to firm value than stock repurchases in countries with weak investor protection. More specifically, we report that dividends contribute approximately 60% more to firm value than stock repurchases in countries with weak investor protection. Furthermore, the marginal value of cash increases with the proportion of stock repurchase in total payouts (the sum of dividends and repurchases) in countries with strong investor protection, while it declines with the stock repurchase proportion in weak investor protection countries. In countries with poor protection, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that cash dividends are more effective than stock repurchases in mitigating agency problems of free cash flow in countries with poor investor protection.

Does Monitoring Effect Explain the Relation between Analyst Following and Firm Value?

Researchers argue that analysts’ information acquisition activities increase firm value through reducing agency costs, i.e., the monitoring effect (Jensen and Meckling 1976; Healy and Palepu 2001). However, the existing empirical evidence on analyst monitoring effect is limited and inconclusive. This paper extends the literature by examining 1) whether analyst following is related to higher firm value; and 2) if the relation is positive, whether the positive relation reflects analyst monitoring effect. We document a positive relation between analyst following and asset value and the positive relation is consistent with analyst monitoring effect as reflected in two aspects. First, the positive effect is significant for cash and much weaker for other assets. This is consistent with a stronger monitoring effect for assets that are subject to higher agency costs or information asymmetry. Second, consistent with analyst following constraining asset mismanagement or motivating more efficient asset use, analyst following is related to higher subsequent operating performance and total payout of cash.