The Effect of Financial Flexibility on Payout Policy

2018 ◽  
Vol 55 (1) ◽  
pp. 263-289
Author(s):  
Anil Kumar ◽  
Carles Vergara-Alert
Keyword(s):  
Causal Effect ◽  
Sharp Decrease ◽  
Payout Policy ◽  
Share Repurchases ◽  
Standard Deviation Increase ◽  
Financial Flexibility ◽  
Exogenous Shocks ◽  
Investment Opportunities ◽  
Debt Capacity ◽  
Real Estate Prices

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

Managerial Entrenchment and Payout Policy

2004 ◽  
Vol 39 (4) ◽  
pp. 759-790 ◽  
Author(s):  
Aidong Hu ◽  
Praveen Kumar
Keyword(s):  
Payout Policy ◽  
Share Repurchases ◽  
Management Compensation ◽  
Governance Mechanisms ◽  
Internal Governance ◽  
Managerial Entrenchment ◽  
Dividend Payments ◽  
Internal Governance Mechanisms ◽  
Investment Opportunities ◽  
Out Of Sample

AbstractBuilding on the managerial entrenchment literature, we develop and test a novel perspective on payout policy that integrates the influence of internal governance mechanisms, investment opportunities, management compensation, and monitoring by large shareholders. Our study incorporates both dividend payments and share repurchases, and examines the determinants of the likelihood and the level of payouts. Our model performs well in both in-sample and out-of-sample predictions on a sample of 2,081 firms during 1992–2000. We find that both the likelihood and the level of payouts are significantly and positively (negatively) related to factors that increase (decrease) executive entrenchment levels, even when controlling for size, leverage, and the proportion of tangible to total assets. We identify factors that significantly affect the likelihood but not the level of payouts (or vice versa), and show that entrenchment has an asymmetric influence on dividend vs. shares repurchase policy.

Does dividend policy drive repurchases? An empirical study

2015 ◽  
Vol 42 (1) ◽  
pp. 13-22 ◽  
Author(s):  
Nan Liu ◽  
Jamshid Mehran
Keyword(s):  
Design Methodology ◽  
Substitution Effect ◽  
Payout Policy ◽  
Share Repurchases ◽  
Tobit Regression ◽  
Dividend Payout ◽  
Content Type ◽  
Dividend Policies ◽  
Investment Opportunities ◽  
Quarterly Dividend

Purpose – The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more flexible than dividends and managers have a strong desire to maintain dividend levels and dividend payout ratio of the firms. Design/methodology/approach – The authors first run a Tobit regression to examine whether firms meeting or just beating the quarterly dividend per share threshold exhibit unusually high repurchases, controlling for the factors shown to affect repurchases. The authors then calculate abnormal repurchases and compare firms that would otherwise miss the benchmark with other firms. Findings – The authors find that firms meeting or just beating the quarterly dividend per share threshold repurchase more shares than other firms, after controlling for the substitution effect, investment opportunities and financial performance. In addition, firms otherwise missing the quarterly dividend per share threshold repurchase abnormally more shares to meet the threshold. Originality/value – The study contributes to the payout policy literature in the following ways. First, it extends the understanding of the association between dividend payout and repurchase. Second, it contributes to the threshold literature by showing that firms manipulate repurchases in addition to earnings to meet their quarterly dividend per share threshold. Third, it provides support to the survey evidence that firms have a strong desire to maintain their dividend policies.

Do Firms Purposefully Change Capital Structure? Evidence from an Investment-Opportunity Shock to Drug Firms

2020 ◽  
pp. 1-30
Author(s):  
Erasmo Giambona ◽  
Joseph Golec ◽  
Florencio Lopez-de-Silanes
Keyword(s):  
Capital Structure ◽  
Price Competition ◽  
Debt Maturity ◽  
Investment Opportunity ◽  
Convertible Debt ◽  
Financial Flexibility ◽  
Structure Changes ◽  
Unsecured Debt ◽  
Investment Opportunities ◽  
Debt Capacity

We study the capital structure changes of drug firms after an investment-opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference-in-difference approach, we show that the shock led drug firms to make their capital structures less constraining by decreasing leverage, shortening debt maturity, increasing unsecured debt, and reducing convertible debt. New debt covenants became less restrictive and firms raised equity to preserve borrowing capacity. Our results support the view that firms actively manage their capital structures to bolster financial flexibility and increase debt capacity in response to new investment opportunities.

Independent Candidates and Political Representation in India

2018 ◽  
Vol 112 (3) ◽  
pp. 678-697 ◽  
Author(s):  
SACHA KAPOOR ◽  
ARVIND MAGESAN
Keyword(s):  
Political Parties ◽  
Voter Turnout ◽  
Political Representation ◽  
Causal Effect ◽  
Political Process ◽  
Vote Share ◽  
The Political ◽  
Standard Deviation Increase ◽  
Percentage Points ◽  
Independent Candidates

We estimate the causal effect of independent candidates on voter turnout and election outcomes in India. To do this, we exploit exogenous changes in the entry deposit candidates pay for their participation in the political process, changes that disproportionately excluded candidates with no affiliation to established political parties. A one standard deviation increase in the number of independent candidates increases voter turnout by more than 6 percentage points, as some voters choose to vote rather than stay home. The vote share of independent candidates increases by more than 10 percentage points, as some existing voters switch who they vote for. Thus, independents allow winning candidates to win with less vote share, decrease the probability of electing a candidate from the governing coalition by about 31 percentage points, and ultimately increase the probability of electing an ethnic-party candidate. Altogether, the results imply that the price of participation by independents is constituency representation in government.

scholarly journals Financial Flexibility as an Investment Efficiency Factor in Asian Companies

2018 ◽  
Vol 20 (2) ◽  
pp. 137 ◽  
Author(s):  
Victoria Cherkasova ◽  
Evgeny Kuzmin
Keyword(s):  
Investment Efficiency ◽  
Small Companies ◽  
Investment Activity ◽  
Financial Flexibility ◽  
Investment Expenditure ◽  
Institutional Economic ◽  
The Difference ◽  
Debt Capacity ◽  
The Impact ◽  
Capacity Method

This study explores the impact of a company’s financial flexibility on the effectiveness of its investments.The number of companies that have financial flexibility was calculated with the application of thespare debt capacity method. The research identifies the impact of financial flexibility on investment activity and on the level of suboptimal investments. The data from 1,736 companies in theAsian region, during the 2005-2015time period, are presented. The Asian region has unique institutional, economic and commercial environments that present a great basis for this paper. The results of the research reveal that financially flexible companies spend more on their investment expenditure and conduct more effective investment policiesby reducing the level of over- and underinvestment. Financial flexibility helps companies to make effective investments during a crisis period, but the difference in the flexibility between developed and developing countries and between large and small companies was not observed.

scholarly journals Impact of Corporate Governance on Firms’ Financial Flexibility in the Emerging Economy: Evidence From Bangladesh

2019 ◽  
Vol 9 (4) ◽  
pp. 183
Author(s):  
Md Rashidul Islam ◽  
Man Wang ◽  
Muhammad Zulfiqar
Keyword(s):  
Corporate Governance ◽  
Firm Size ◽  
Significant Influence ◽  
Financial Constraints ◽  
Positive Impact ◽  
Financial Flexibility ◽  
Book Value ◽  
Internal Funds ◽  
Debt Capacity ◽  
The Relationship

Corporate governance has a positive impact on firm performance. Financial flexible firms are a better performer when there are financial constraints as well as financial crises. However, what motivates financial flexibility is a dearth research area in the existing finance literature. The objectives of this research are to investigate the relationship between corporate governance and financial flexibility; how corporate governance influence financial flexibility; and, what factors of corporate governance are dominant to influence financial flexibility. To pursue the research objectives we chose Cement Industry of Bangladesh as a case. We consider liquidity, Internal Funds and Unused debt capacity as the proxy of financial flexibility and Ownership Concentration, Board Size, Board Independence as Corporate Governance variables and Firm Size, Market to Book Ratio, Debt Capacity, Financial Constraints and Firm Age as control variable to estimate the relationship between corporate governance and financial flexibility. This study evidences that Board Structure has no significant influence on firms’ cash holding(Liquidity).However, Firms Age and Market to Book Value have a significant influence on firms' cash position. This study also finds that Ownership Structure has no positive impact on Firms' Unused Debt Capacity but Financial Constraints and Market to Book Value have a positive significant impact on firms' unused debt capacity. However, Firm Size has a positive relationship with Internal Funds.

scholarly journals Corporate Payout Policy and CEO Compensation Structure

2018 ◽  
Vol 8 (2) ◽  
pp. 179
Author(s):  
Lee-Hsien Pan ◽  
Thomas Barkley ◽  
Shaio-Yan Huang
Keyword(s):  
Ceo Compensation ◽  
Payout Policy ◽  
Free Cash Flow ◽  
Share Repurchases ◽  
Negative Effects ◽  
Total Compensation ◽  
Dividend Payout ◽  
Leverage Ratio ◽  
Compensation Structure ◽  
Investment Projects

This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. Specifically, it studies the effects of CEO compensation structure, firm characteristics, and dividend payout policies on dividend type and relative dividend size.It finds CEO salary is positively associated with cash dividends, share repurchases, and relative dividend size whereas CEO salary (compared to bonus) as a percentage of total compensation has negative effects on cash dividends and share repurchases. It also discovers CEO stock awards as a percentage of total compensation are positively associated with share repurchases and CEO option awards are negatively related to cash dividends.In addition, this paper shows larger firms and firms with more free cash flow distribute more cash dividends and share repurchases. On the other hand, firms with higher leverage ratio and more investment opportunities prefer to save earnings for future re-investment projects. Finally, it show dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. The results of this study suggest that CEO compensation components affect CEOs’ dividend payout decisions: when CEOs’ stock award increases, they prefer to use share repurchases; when CEOs’ option award increases, they prefer not to use cash dividends.

Valuing firm’s financial flexibility under default risk and bankruptcy costs: a WACC based approach

2019 ◽  
Vol 15 (5) ◽  
pp. 688-699
Author(s):  
Carlo Mari ◽  
Marcella Marra
Keyword(s):  
Capital Structure ◽  
Default Risk ◽  
Weighted Average ◽  
Debt Management ◽  
Costs And Benefits ◽  
Debt Structure ◽  
Financial Flexibility ◽  
Content Type ◽  
Bankruptcy Costs ◽  
Debt Capacity

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm’s capital structure more realistic and allows us to include flexibility into the firm’s debt structure management. The firm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

scholarly journals A multivariable Mendelian randomization analysis investigating smoking and alcohol consumption in oral and oropharyngeal cancer

2020 ◽  
Vol 11 (1) ◽  
Author(s):  
Mark Gormley ◽  
Tom Dudding ◽  
Eleanor Sanderson ◽  
Richard M. Martin ◽  
Steven Thomas ◽  
...  
Keyword(s):  
Standard Deviation ◽  
Alcohol Consumption ◽  
Oropharyngeal Cancer ◽  
Genome Wide Association Study ◽  
Mendelian Randomization ◽  
Causal Effect ◽  
Strong Association ◽  
Smoking Behaviour ◽  
Standard Deviation Increase ◽  
Independent Effects

AbstractThe independent effects of smoking and alcohol in head and neck cancer are not clear, given the strong association between these risk factors. Their apparent synergistic effect reported in previous observational studies may also underestimate independent effects. Here we report multivariable Mendelian randomization performed in a two-sample approach using summary data on 6,034 oral/oropharyngeal cases and 6,585 controls from a recent genome-wide association study. Our results demonstrate strong evidence for an independent causal effect of smoking on oral/oropharyngeal cancer (IVW OR 2.6, 95% CI = 1.7, 3.9 per standard deviation increase in lifetime smoking behaviour) and an independent causal effect of alcohol consumption when controlling for smoking (IVW OR 2.1, 95% CI = 1.1, 3.8 per standard deviation increase in drinks consumed per week). This suggests the possibility that the causal effect of alcohol may have been underestimated. However, the extent to which alcohol is modified by smoking requires further investigation.

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