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Financing Payouts

Part of: JFQA William F. Sharpe Best Paper Award Winner

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 ronim@hku.hk
Martin Schmalz
Affiliation:
University of Oxford Saïd Business School, CEPR, CESIfo, and ECGI Martin.Schmalz@sbs.ox.ac.uk
*
jfarre@uic.edu (corresponding author)
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Abstract

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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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 60 , Issue 4 , June 2025 , pp. 1586 - 1624
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).

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