Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-25T18:08:21.093Z Has data issue: false hasContentIssue false
  • English
  • Français

Financing Payouts

Published online by Cambridge University Press:  01 April 2024

Joan Farre-Mensa Open the ORCID record for Joan Farre-Mensa [Opens in a new window] ,
Roni Michaely Open the ORCID record for Roni Michaely [Opens in a new window]  and
Martin Schmalz Open the ORCID record for Martin Schmalz [Opens in a new window]
Joan Farre-Mensa*
Affiliation:
University of Illinois Chicago College of Business Administration
Roni Michaely
Affiliation:
University of Hong Kong Faculty of Business and Economics and ECGI [email protected]
Martin Schmalz
Affiliation:
University of Oxford Saïd Business School, CEPR, CESIfo, and ECGI [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We find that 43% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate payouts being externally financed, primarily with debt. Most financed payouts cannot be explained by payout smoothing in response to volatile earnings or investment (rather, they are the result of firms persistently setting payouts above free cash flow). In fact, 25% of aggregate payouts could not have been paid without the firms simultaneously raising capital. Profitable firms with moderate growth use debt-financed payouts to jointly manage their leverage and cash, thus highlighting the close relationship between payout and capital structure decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 39
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We would like to thank several anonymous referees, Malcolm Baker, Nittai Bergman, David Denis, Andrew Ellul, Michael Faulkender, Tobin Hanspal, Jarrad Harford (the editor), Gerard Hoberg, Mauricio Larrain, Alexander Ljungqvist, Uday Rajan, Matt Rhodes-Kropf, Sheridan Titman, Alex Wagner, Toni Whited, Jeffrey Zwiebel, and audiences at the 2017 AFA Meetings, 2016 SFS Cavalcade, 2021 MFA Conference, 2015 UNC-Duke Corporate Finance Conference, 2015 Red Rock Finance Conference, 2015 Washington University Corporate Finance Conference, 2015 TAU Finance Conference, 2019 Concurrent Issues in Finance and Accounting Conference, Harvard Business School, University of Kentucky, University of Melbourne, University of Michigan, Monash University, Singapore Management University, IDC, University of Paris Dauphine, VICIF, Australian National University (FIRN virtual seminar), Deakin University, University of Zurich, York University, University of Birmingham, MSU/UIC Virtual Finance Seminar, University of Liverpool, and University of Bath. Farre-Mensa acknowledges funding from the CBA’s Dean Summer Research Grant; Schmalz acknowledges funding from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy – EXC 2126/1-390838866; Michaely acknowledges financial support from the National Nature Science Foundation of China (Project No. 72332002).

References

Acharya, V.; Davydenko, S.; and Strebulaev, I.. “Cash Holdings and Credit Risk.” Review of Financial Studies, 25 (2012), 3572–3609.CrossRefGoogle Scholar
Albertus, J.; Glover, B.; and Levine, O.. “Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts.” Journal of Financial Economics, 144 (2022), 298–327.CrossRefGoogle Scholar
Altinkiliç, O., and Hansen, R. S.. “Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs.” Review of Financial Studies, 13 (2000), 191–218.CrossRefGoogle Scholar
Amberger, H., and Robinson, L.. “The Initial Effect of U.S. Tax Reform on Foreign Acquisitions.” Review of Accounting Studies, 29 (2024), 996–1038.CrossRefGoogle Scholar
Anthony, J. H., and Ramesh, K.. “Association Between Accounting Performance Measures and Stock Prices: A Test of the Life Cycle Hypothesis.” Journal of Accounting and Economics, 15 (1992), 203–227.CrossRefGoogle Scholar
Apple Inc. “Prospectus Supplement Dated February 2.” Available at https://www.sec.gov/Archives/edgar/data/320193/000119312515031599/d861669d424b2.htm (2015).Google Scholar
Azar, J.; Kagy, J.-F.; and Schmalz, M.. “Can Changes in the Cost of Carry Explain the Dynamics of Corporate ‘Cash’ Holdings?” Review of Financial Studies, 29 (2016), 2194–2240.CrossRefGoogle Scholar
Begenau, J., and Salomao, J.. “Firm Financing over the Business Cycle.” Review of Financial Studies, 32 (2019), 1235–1274.CrossRefGoogle Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483–527.CrossRefGoogle Scholar
Campello, M.; Graham, J. R.; and Harvey, C. R.. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics, 97 (2010), 470–487.CrossRefGoogle Scholar
Chetty, R., and Saez, E.. “Dividend and Corporate Taxation in an Agency Model of the Firm.” American Economic Journal: Economic Policy, 2 (2010), 1–31.Google Scholar
Cooper, I. A., and Lambertides, N.. “Large Dividend Increases and Leverage.” Journal of Corporate Finance, 48 (2018), 17–33.CrossRefGoogle Scholar
Danis, A.; Rettle, D.; and Whited, T.. “Refinancing, Profitability, and Capital Structure.” Journal of Financial Economics, 114 (2014), 424–443.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Skinner, D. J.. “Corporate Payout Policy.” Foundations and Trends in Finance, 3 (2008), 95–287.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R.. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life–Cycle Theory.” Journal of Financial Economics, 81 (2006), 227–254.CrossRefGoogle Scholar
DeAngelo, H.; Gonçalves, A. S.; and Stulz, R.. “Leverage and Cash Dynamics.” Review of Finance, 26 (2022), 1101–1144.CrossRefGoogle Scholar
Denis, D. J., and Denis, D. K.. “Managerial Discretion, Organizational Structure, and Corporate Performance: A Study of Leveraged Recapitalizations.” Journal of Accounting and Economics, 16 (1993), 209–236.CrossRefGoogle Scholar
Dittmar, A. “Why Do Firms Repurchase Stock?” Journal of Business, 73 (2000), 331–355.CrossRefGoogle Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (1984), 650–659.Google Scholar
Eckbo, B. E., and Kisser, M.. “The Leverage-Profitability Puzzle Resurrected.” Review of Finance, 25 (2021), 1089–1128.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Financing Decisions: Who Issues Stock?” Journal of Financial Economics, 76 (2005), 549–582.CrossRefGoogle Scholar
Farre-Mensa, J.; Michaely, R.; and Schmalz, M.. “Payout Policy.” Annual Review of Financial Economics, 6 (2014), 75–134.CrossRefGoogle Scholar
Faulkender, M., and Petersen, M.. “Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act.” Review of Financial Studies, 25 (2012), 3351–3388.CrossRefGoogle Scholar
Fazzari, S. R.; Hubbard, G.; and Petersen, B. C.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141–195.CrossRefGoogle Scholar
Foley, C. F.; Hartzell, J. C.; Titman, S.; and Twite, G.. “Why Do Firms Hold So Much Cash? A Tax-Based Explanation.” Journal of Financial Economics, 86 (2007), 579–607.CrossRefGoogle Scholar
Frank, M., and Sanati, A.. “Financing Corporate Growth.” Review of Financial Studies, 34 (2021), 4926–4998.CrossRefGoogle Scholar
Goldschlag, N., and Miranda, J.. “Business Dynamics Statistics of High Tech Industries.” Journal of Economics & Management Strategy, 29 (2020), 3–30.Google Scholar
Graham, J. R. “Debt and the Marginal Tax Rate.” Journal of Financial Economics, 41 (1996), 41–73.CrossRefGoogle Scholar
Graham, J. R. “How Big Are the Tax Benefits of Debt?” Journal of Finance, 55 (2000), 1901–1941.CrossRefGoogle Scholar
Grennan, J. “Dividend Payments as a Response to Peer Influence.” Journal of Financial Economics, 131 (2019), 549–570.CrossRefGoogle Scholar
Grullon, G.; Michaely, R.; and Swaminathan, B.. “Are Dividend Changes a Sign of Firm Maturity?” Journal of Business, 75 (2002), 387–424.CrossRefGoogle Scholar
Hanlon, M.; Lester, R.; and Verdi, R.. “The Effect of Repatriation Tax Costs on U.S. Multinational Investment.” Journal of Financial Economics, 116 (2015), 179–196.CrossRefGoogle Scholar
Heider, F., and Ljungqvist, A.. “As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes.” Journal of Financial Economics, 118 (2015), 684–712.CrossRefGoogle Scholar
Hennessy, C., and Whited, T.. “How Costly is External Financing? Evidence from a Structural Estimation.” Journal of Finance, 62 (2007), 1705–1745.CrossRefGoogle Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Hribar, P.; Jenkins, N. T.; and Johnson, B.. “Stock Repurchases as an Earnings Management Device.” Journal of Accounting and Economics, 41 (2006), 3–27.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C. P.; and Weisbach, M. S.. “Financial Flexibility and the Choice Between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Kahle, K. M. “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options.” Journal of Financial Economics, 63 (2002), 235–261.CrossRefGoogle Scholar
Lambrecht, B., and Myers, S. C.. “A Lintner Model of Payout and Managerial Rents.” Journal of Finance, 67 (2012), 1761–1810.CrossRefGoogle Scholar
Leary, M. T., and Michaely, R.. “Determinants of Dividend Smoothing: Empirical Evidence.” Review of Financial Studies, 24 (2011), 3197–3249.CrossRefGoogle Scholar
Lie, E. “Do Firms Undertake Self-Tender Offers to Optimize Capital Structure?” Journal of Business, 75 (2002), 609–639.CrossRefGoogle Scholar
Ma, Y. “Non-Financial Firms as Cross-Market Arbitrageurs.” Journal of Finance, 74 (2019), 3041–3087.CrossRefGoogle Scholar
McKeon, S. “Employee Option Exercise and Equity Issuance Motives.” Working Paper, University of Oregon (2015).Google Scholar
Michaely, R.; Rossi, S.; and Weber, M.. “Signaling Safety.” Journal of Financial Economics, 139 (2021), 405–427.CrossRefGoogle Scholar
Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Miller, M. H., and Rock, K.. “Dividend Policy Under Asymmetric Information.” Journal of Finance, 40 (1985), 1031–1051.CrossRefGoogle Scholar
Myers, S. C. “The Capital Structure Puzzle.” Journal of Finance, 39 (1984), 574–592.CrossRefGoogle Scholar
Myers, S. C. “Capital Structure.” Journal of Economic Perspectives, 15 (2000), 81–102.CrossRefGoogle Scholar
Myers, S. C., and Majluf, N.. “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Ross, S.; Westerfield, R.; Jaffe, J.; and Jordan, B.. Corporate Finance, 13th ed. New York, NY: McGraw-Hill Education (2022).Google Scholar
SEC. Important Information About EDGAR. Available at https://www.sec.gov/edgar/searchedgar/aboutedgar.htm (2021).Google Scholar
Tax Policy Center. Key Elements of the U.S. Tax System. Available at https://www.taxpolicycenter.org/briefing–book/what–tcja–repatriation–tax–and–how–does–it–work (2020).Google Scholar
Vermaelen, T. “Common Stock Repurchases and Market Signaling.” Journal of Financial Economics, 9 (1981), 139–183.CrossRefGoogle Scholar
Whited, T. “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data.” Journal of Finance, 47 (1992), 1425–1460.CrossRefGoogle Scholar
Wruck, K. H. “Financial Policy, Internal Control, and Performance: Sealed Air Corporation’s Leveraged Special Dividend.” Journal of Financial Economics, 36 (1994), 157–192.CrossRefGoogle Scholar
Supplementary material: File

Farre-Mensa et al. supplementary material

Farre-Mensa et al. supplementary material
Download Farre-Mensa et al. supplementary material(File)
File 446.8 KB