Corporate Payout Policy

DeAngelo, DeAngelo and Skinner wrote this monograph as a survey and synthesis of the academic literature on how and why firms return cash to shareholders.

The starting point is the Miller and Modigliani irrelevance result, which shows that in a world without taxes, transaction costs or information asymmetries, payout policy does not affect firm value because investors can create any cash flow pattern they want by selling shares. The survey then works through what happens when each assumption is relaxed.

The authors' own central argument concerns the necessity of payout. They hold that firms cannot retain earnings indefinitely, because a mature firm generating cash beyond its investment opportunities will accumulate a balance that eventually swamps the operating business, and because agency problems mean managers holding large cash balances will misallocate them. Payout is therefore not optional in the long run, and the interesting questions are about timing and form rather than about whether.

The empirical material covers the documented patterns: the concentration of dividends among a small number of large mature profitable firms; the disappearance of dividends among newly listed firms; the growth of repurchases, which overtook dividends in aggregate; the stickiness of dividends, which managers are extremely reluctant to cut, established by Lintner's survey work and confirmed repeatedly; and the flexibility of repurchases, which are adjusted freely.

They also survey the signalling literature, the clientele explanations, the catering theory and the life-cycle explanation, which holds that a firm's payout follows from where it sits between growth and maturity and which they consider best supported.

The monograph is written for researchers and assumes familiarity with the literature. It is from 2009 and predates further growth in repurchases and the associated policy debate.