Corporate Payout Policy, Cash Savings, and the Cost of Consistency: Evidence from a Structural Estimation. Issue 4 (8th April 2013)

• Record Type: Journal Article
• Authors: Mahmudi, Hamed; Pavlin, Michael
• Is Part Of: Financial management. Volume 42:Issue 4(2013:Winter)
• Page Start: 843
• Page End: 874
• Publication Date: 2013-04-08
• Subjects: Corporations -- Finance -- Periodicals; 658.1505
• DOI: 10.1111/fima.12018
• Languages: English
• ISSNs: 0046-3892

Abstract

Abstract : We develop a dynamic structural model to better understand how corporate payout policy is determined in conjunction with other corporate decisions. In a first‐best model, a manager maximizes equity value by choosing the firm's optimal financing, investment, dividends, and cash holdings. By using simulated method of moments, we show that, on average, firms excessively smooth their payout while making corporate savings overly volatile and retaining excess cash. We then extend the model to capture the effect of a manager, who perceives a cost to cutting payouts. Estimating the model, we infer the magnitude of this cost. We find that a managerial preference for consistent payout explains the smooth payout and high volatility of cash holdings.