Payout Policy Pedagogy: What Matters and Why


  • 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.


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.