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Payout Policy with Legal Restrictions
Author(s) -
Mansi Sattar A.,
Wald John K.
Publication year - 2011
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/j.1755-053x.2011.01158.x
Subject(s) - dividend , dividend payout ratio , debt , equity (law) , monetary economics , business , asset (computer security) , cash flow , liability , free cash flow , constraint (computer aided design) , payment , dividend policy , economics , finance , law , mechanical engineering , computer security , political science , computer science , engineering
We hypothesize that firms that face limitations on debt may use increased dividend payments to mitigate the free cash flow problem. Limitations on debt are implicit in state laws that restrict the firm from making payouts when the asset‐to‐liability ratio is low. We find that: 1) firms incorporated in states with stricter payout restrictions pay more dividends, 2) the probability of paying dividends or repurchasing shares decreases as firms approach a binding payout constraint, and 3) bonding with dividends is less prevalent with increased managerial equity holdings. In addition, antitakeover and director liability laws have a less consistent effect on payout policy.