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The Effect of Financial Flexibility on Payout Policy

Published online by Cambridge University Press:  19 September 2018


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.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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We thank two anonymous referees for their helpful comments and guidance. We also thank Miguel Anton, João Cocco, John Core, Nicolae Gârleanu, Jarrad Harford (the editor), William Megginson, Gaizka Ormazabal, Albert Saiz, Martin Schmalz, Xavier Vives, and conference and seminar participants at the 2017 American Finance Association meetings, the 2016 Financial Management Association annual meetings, Aarhus University, ESCP Paris, ESSEC Business School, IESE Business School, Massachusetts Institute of Technology, Swiss Finance Institute–University of Zurich, Syracuse University, Université Paris-Dauphine, the University of Barcelona, and the University of Konstanz for their helpful comments. We are especially thankful to Real Capital Analytics for providing us with the commercial property price index (CPPI) data. Kumar acknowledges financial support by the Aarhus University Research Foundation (AUFF-E-2017-7-10). Vergara-Alert acknowledges financial support by the Public–Private Sector Research Center at IESE, the Ministry of Economy of Spain (ref. ECO2015-63711-P), and AGAUR (ref: 2017-SGR-1244).


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