This work was supported by the Charles E. Cook/Community Bank and Kenneth King Stonier Chairs at the Marshall School of Business of the University of Southern California. We thank Michael Jensen, René Stulz, and an anonymous referee for helpful comments on this paper. Correspondence: Harry DeAngelo.
Payout Policy Pedagogy: What Matters and Why
Article first published online: 8 JAN 2007
European Financial Management
Volume 13, Issue 1, pages 11–27, January 2007
How to Cite
DeAngelo, H. and DeAngelo, L. (2007), Payout Policy Pedagogy: What Matters and Why. European Financial Management, 13: 11–27. doi: 10.1111/j.1468-036X.2006.00283.x
- Issue published online: 8 JAN 2007
- Article first published online: 8 JAN 2007
- payout policy;
- dividend puzzle
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.