Factors influencing the payout policy

Résumé du document

During their life firms face the constant decision of whether or not to distribute cash among their shareholders and to what extent to do so. There are two main methods for redistributing cash to the shareholders: dividends and share repurchases. Through dividends, a fraction of earnings is paid out as direct income to the shareholders according to the capital rights of the shares. Share repurchases, on the other hand, is a process in which a proportion of a company's outstanding shares is repurchased. In this paper we aim to analyze four important factors which influence the payout decision. These are, the tax influence, the life-cycle stage of a firm, the choice between share repurchase and dividend payout, and the influence of investment opportunities.

Extraits

[...] 533- 552 Lintner, J Distribution of incomes of corporations among divdends, retained earnings, and taxes, American Econmoic review, Vol pp 113 Modigliani, F., Miller, M. H Dividend Policy, Growth, and the Valuation of Shares, Journal of Business, vol. XXXIV (October, 1961), 235- 64 Pettit, R. R., Taxes, (1977), Transaction Cost and the Clientele Effects of Dividends, Journal of Financial Economics, Vol pp. [...]

[...] Tax reasons According to Miller and Modigliani (1961), different investor groups are taxed differently and the firm should act to minimize the tax burden for all these groups. This affects the payout decision. Furthermore, even if the investors are taxed in a similar way, the capital gains tax can be lower than the tax on dividends (Allen and Michaely 2002). The heavier taxation of dividends compared to capital gains is a commonly discussed disadvantage of dividends compared to share repurchases (Fama and French 2000). [...]

[...] In sum, this management problem leads us to draw on our research question. What factors influence the payout policy of a firm? - In answering this question we will briefly look at four different aspects. All of them have a major role in determining which payout policy yields the most preferable outcome. First of all, we discuss the role of taxes on payout policy. Which way does the taxation affect the choice of the firms and which policy do investors prefer? [...]

[...] In this paper we aim to analyze four important factors which influence the payout decision. These are the tax influence, the life-cycle stage of a firm, the choice between share repurchase and dividend payout and the influence of investment opportunities. Introduction Stockholders provide funds to a company, because they believe that a firm is a good investment for their excess of money. They expect a firm to compete successfully in the market. A firm could create value for their suppliers of funds by growing, by realizing stable profits or by taking on successful mergers and acquisitions. [...]

[...] Transaction and flotation costs are low, largely thanks to firm size. Fama and Babiak (1968) adds that the dividend payout ratio (dividends/earnings) tends to follow the life cycle of the firm, starting at zero when the firm is in high growth and gradually increasing as the firm matures and its growth prospects decrease. Fargher and Weigand (2006) assert that any change in life cycle signalled by a dividend increase is likely to be incremental compared with the signal of changing firm maturity communicated by a first-time dividend. [...]