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Corporate Payout Policy, Cash Savings, and the Cost of Consistency: Evidence from a Structural Estimation
Author(s) -
Mahmudi Hamed,
Pavlin Michael
Publication year - 2013
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12018
Subject(s) - volatility (finance) , dividend payout ratio , cash flow , equity (law) , structural estimation , dividend , cash , econometrics , business , monetary economics , economics , corporate finance , investment (military) , finance , dividend policy , politics , political science , law
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.