Optimal Payout Ratio under Uncertainty and the Flexibility Hypothesis : Theory and Empirical Evidence

Following the flexibility dividend hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo's (2006) optimal payout policy in terms of flexibility dividend hypothesis. In addition, we also introduce growth rate, systematic risk, and total risk variables into the theoretical model.To test our theoretical results derived in this paper, we use the U.S. data during 1969 to 2009 to investigate the impact of growth rate, systematic risk, and total risk on the optimal payout ratio in terms of fixed effects model. We find that a company will reduce its payout when the growth rate increases for the flexibility concern. In addition, we find that there exists a nonlinear relationship between the payout ratio and the risk. In other words, the relationship between the payout ratio and risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Therefore, our theoretical model and empirical results can be used to identify whether flexibility or free cash flow hypothesis should be used to determine the dividend policy