Corporate Payout Policy

We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies - i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors' behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.1 Introduction2 Basic Theory: The Need to Distribute Free Cash Flow is Foundational3 Security Valuation Problems, Agency Costs, and Optimal Payout Policy4 Corporate Payouts: Scale, Concentration, and Earnings Linkage5 Payouts and Earnings: A Closer Look6 Are Dividends Disappearing'7 Why Do Dividends Survive'8 Signaling and the Information Content of Dividends9 Behavioral Influences on Payout Policy10 Clientele Effects: Transaction Costs, Institutional Ownership, and Payout Policy11 Controlling Stockholders and Payout Policy12 Taxes and Payout Policy13 The Advantages of Stock Repurchases14 Conclusion: What We Know About Payout Policy and Promising Avenues for Future Research