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Payout Policy Pedagogy: What Matters and Why
Author(s) -
DeAngelo Harry,
DeAngelo Linda
Publication year - 2007
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2006.00283.x
Subject(s) - agency (philosophy) , investment (military) , economics , medical prescription , simple (philosophy) , value (mathematics) , business , political science , sociology , medicine , computer science , social science , philosophy , epistemology , politics , law , pharmacology , machine learning
This paper argues that we should abandonMM (1961)irrelevance as the foundation for teaching payout policy, and instead emphasise the need to distribute the full value generated by investment policy (‘full payout’). Because MM's assumptions restrict payouts to an optimum, their irrelevance theorem does not provide the appropriate prescription for managerial behaviour. A simple example clarifies why the correct prescription is ‘full payout’, and why both payout and investment policy matter even absent agency costs (DeAngelo and DeAngelo, 2006). A simple life‐cycle generalisation explains the main stylised facts about the payout policies of US and European firms.