The impact of uncertainty on payout policy
Abstract
Purpose
The purpose of this paper is to investigate the impact of market-level uncertainty on dividend and repurchase decisions.
Design/methodology/approach
Using a large data set over a nearly 50-year period, the author examines the choice to pay dividends and repurchase shares using logit and multinomial logit regressions.
Findings
Market-level uncertainty (measured by a GARCH estimate of volatility, as well as the Chicago Board Options Exchange Volatility Index) is shown to have a statistically significant impact on firms’ payout policy decisions. This impact is different for dividends and repurchases as well as for firms with differing levels of cash flows. As market uncertainty increases, firms with low cash flow levels tighten dividend policy to conserve cash while firms with high cash flow levels become opportunistic through the use of share repurchases.
Practical implications
The findings allow investors to better understand the connection between shifts in market-level uncertainty and corporate payout policy, specifically through the differing use of dividends and repurchases.
Originality/value
While prior literature on payout policy has focused on firm-level determinants, this study demonstrates that market-level uncertainty impacts firms’ payout policy decisions uniquely. Furthermore, this is, to the author’s knowledge, the first study to differentiate by relative cash flow level, demonstrating that not all cash flow levels react in the same manner.
Keywords
Citation
Walkup, B. (2016), "The impact of uncertainty on payout policy", Managerial Finance, Vol. 42 No. 11, pp. 1054-1072. https://doi.org/10.1108/MF-09-2015-0237
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited