Skip to main content Accessibility help
×
Home
Hostname: page-component-559fc8cf4f-x5fd4 Total loading time: 0.261 Render date: 2021-02-28T22:27:11.307Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": false, "newCiteModal": false, "newCitedByModal": true }

The Effect of Financial Flexibility on Payout Policy

Published online by Cambridge University Press:  19 September 2018

Abstract

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.

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

Access options

Get access to the full version of this content by using one of the access options below.

Footnotes

1

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).

References

Almazan, A.; De Motta, A.; Titman, S.; and Uysal, V.. “Financial Structure, Acquisition Opportunities, and Firm Locations.” Journal of Finance, 65 (2010), 529563.CrossRefGoogle Scholar
Almeida, H.; Campello, M.; and Weisbach, M.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 17771804.CrossRefGoogle Scholar
Bliss, B. A.; Cheng, Y.; and Denis, D. J.. “Corporate Payout, Cash Retention, and the Supply of Credit: Evidence from the 2008–2009 Credit Crisis.” Journal of Financial Economics, 115 (2015), 521540.CrossRefGoogle Scholar
Bonaime, A.; Hankins, K.; and Harford, J.. “Financial Flexibility, Risk Management, and Payout Choice.” Review of Financial Studies, 27 (2014), 10741101.CrossRefGoogle Scholar
Bonaime, A.; Harford, J.; and Moore, D.. “Payout Policy Tradeoffs and the Rise of 10b5-1 Preset Repurchase Plans.” Management Science, forthcoming (2019).Google Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483527.CrossRefGoogle Scholar
Buiter, W.Housing Wealth Isn’t Wealth.” Economics: The Open-Access, Open-Assessment E-Journal, 4 (2010), 129.Google Scholar
Chaney, T.; Sraer, D.; and Thesmar, D.. “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment.” American Economic Review, 102 (2012), 23812409.CrossRefGoogle Scholar
Chen, T.; Harford, J.; and Lin, C.. “Financial Flexibility and Corporate Cash Policy.” Working Paper, Hong Kong Institute for Monetary Research (2017).Google Scholar
Cvijanovic, D.Real Estate Prices and Firm Capital Structure.” Review of Financial Studies, 27 (2014), 26902735.CrossRefGoogle Scholar
Davidoff, T.Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated with Many Demand Factors.” Critical Finance Review, 5 (2016), 177206.CrossRefGoogle Scholar
DeAngelo, H., and DeAngelo, L.. “Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms.” Journal of Finance, 45 (1990), 14151431.CrossRefGoogle Scholar
Denis, D.; Denis, D.; and Sarin, A.. “The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles.” Journal of Financial and Quantitative Analysis, 29 (1994), 567587.CrossRefGoogle Scholar
Farre-Mensa, J.; Michaely, R.; and Schmalz, M.. “Financing Payouts.” Ross School of Business Paper 1263 (2018).Google Scholar
Ghosh, C., and Woolridge, J. R.. “An Analysis of Shareholder Reaction to Dividend Cuts and Omissions.” Journal of Financial Research, 11 (1988), 281294.CrossRefGoogle Scholar
Glaeser, E.; Gyourko, J.; and Saiz, A.. “Housing Supply and Housing Bubbles.” Journal of Urban Economics, 64 (2008), 198217.CrossRefGoogle Scholar
Guay, W., and Harford, J.. “The Cash-Flow Permanence and Information Content of Dividend Increases versus Repurchases.” Journal of Financial Economics, 57 (2000), 385415.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 19091940.CrossRefGoogle Scholar
Himmelberg, C.; Mayer, C.; and Sinai, T.. “Assessing High House Prices: Bubbles, Fundamentals and Misperceptions.” Journal of Economic Perspectives, 19 (2005), 6792.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C.; and Weisbach, M.. “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355384.CrossRefGoogle Scholar
John, K.; Knyazeva, A.; and Knyazeva, D.. “Does Geography Matter? Firm Location and Corporate Payout Policy.” Journal of Financial Economics, 101 (2011), 533551.CrossRefGoogle Scholar
Kaplan, S., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?Quarterly Journal of Economics, 112 (1997), 169215.CrossRefGoogle Scholar
Leary, M., and Michaely, R.. “Determinants of Dividend Smoothing: Empirical Evidence.” Review of Financial Studies, 24 (2011), 31973249.CrossRefGoogle Scholar
Lie, E.Financial Flexibility, Performance, and the Corporate Payout Choice.” Journal of Business, 78 (2005), 21792202.CrossRefGoogle Scholar
Mian, A., and Sufi, A.. “House Prices, Home Equity–Based Borrowing, and the US Household Leverage Crisis.” American Economic Review, 101 (2011), 21322156.CrossRefGoogle Scholar
Nelson, T.; Potter, T.; and Wilde, H.. “Real Estate Assets on Corporate Balance Sheets.” Journal of Corporate Real Estate, 2 (2000), 2940.CrossRefGoogle Scholar
Rauh, J.Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans.” Journal of Finance, 61 (2006), 3371.CrossRefGoogle Scholar
Saiz, A.The Geographic Determinants of Housing Supply.” Quarterly Journal of Economics, 125 (2010), 12531296.CrossRefGoogle Scholar
Sinai, T., and Souleles, N.. “Owner-Occupied Housing as a Hedge against Rent Risk.” Quarterly Journal of Economics, 120 (2005), 763789.Google Scholar
Veale, P.Managing Corporate Real Estate Assets: Current Executive Attitudes and Prospects for an Emergent Management Discipline.” Journal of Real Estate Research, 4 (1989), 122.Google Scholar
Yoon, P. S., and Starks, L.. “Signaling, Investment Opportunities, and Dividend Announcements.” Review of Financial Studies, 8 (1995), 9951018.CrossRefGoogle Scholar
Zeckhauser, S., and Silverman, R.. “Rediscover Your Company’s Real Estate.” Harvard Business Review, 61 (1983), 111117.Google Scholar

Kumar and Vergara-Alert supplementary material

Kumar and Vergara-Alert supplementary material
File 2 MB

Full text views

Full text views reflects PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.

Total number of HTML views: 0
Total number of PDF views: 1218 *
View data table for this chart

* Views captured on Cambridge Core between 19th September 2018 - 28th February 2021. This data will be updated every 24 hours.

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

The Effect of Financial Flexibility on Payout Policy
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

The Effect of Financial Flexibility on Payout Policy
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

The Effect of Financial Flexibility on Payout Policy
Available formats
×
×

Reply to: Submit a response


Your details


Conflicting interests

Do you have any conflicting interests? *