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Corp. Governance and CSR > Payout Policy > Flashcards

Payout Policy Flashcards

1
Q

What is the goal of payout policy?

A

To decide how and when to distribute cash to shareholders.

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2
Q

What are the two main types of payouts?

A

Dividends and share repurchases

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3
Q

How can payout policy be a governance mechanism?

A

It limits managerial discretion by forcing cash distribution.

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4
Q

What is the tax disadvantage of dividends?

A

Dividends are taxed twice: at the corporate level and as personal income.

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5
Q

What are share repurchases?

A

Firms buy back shares from shareholders, reducing the number of outstanding shares.

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6
Q

Why might firms prefer share repurchases over dividends?

A

Share repurchases provide more flexibility and often have tax advantages.

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7
Q

What is Jensen’s Free Cash Flow Hypothesis?

A

Firms with excess cash may invest in wasteful projects unless payouts are enforced.

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8
Q

Why are mature firms more likely to pay dividends?

A

They generate stable cash flows and have fewer growth opportunities.

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9
Q

What is the signaling theory of dividends?

A

Dividends signal positive future prospects, as only strong firms can sustain them.

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10
Q

How do payout policies relate to agency problems?

A

They reduce agency costs by limiting managerial misuse of cash.

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11
Q

What are accretive share repurchases?

A

Repurchases that increase earnings per share (EPS) by reducing the number of outstanding shares.

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12
Q

Why are accretive repurchases often tied to analyst earnings forecasts?

A

Firms use them to meet or beat forecasted EPS targets.

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13
Q

How do repurchases affect CapEx?

A

Firms often cut CapEx to fund repurchases.

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14
Q

What real effects do repurchases have on employment?

A

Firms engaging in repurchases reduce employment levels.

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15
Q

How does financial flexibility affect the likelihood of repurchases?

A

Financially unconstrained firms are more likely to engage in repurchases.

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16
Q

What is the market reaction to repurchase announcements?

A

The market generally reacts positively, viewing repurchases as a signal of efficient cash use.

17
Q

What is the broader concern about repurchases?

A

They might undermine long-term investment and growth prospects.

18
Q

How do firms use repurchases to manipulate EPS?

A

By reducing the denominator (number of shares) in the EPS calculation.

19
Q

What is the relationship between investment opportunities and repurchases?

A

Firms with fewer growth opportunities are more likely to repurchase shares.

20
Q

Why are analyst expectations significant for repurchases?

A

Firms try to meet these expectations to maintain market credibility.

21
Q

What is the role of institutional investors in dividend policy?

A

They monitor firms and can pressure managers to increase dividends.

22
Q

How does institutional ownership affect dividend yield?

A

Higher institutional ownership leads to higher dividend yields.

23
Q

Why might institutional ownership substitute for payouts?

A

Institutions reduce agency problems directly, making high payouts less necessary.

24
Q

How does Russell index rebalancing provide a shock to institutional ownership?

A

It creates quasi-exogenous changes in institutional holdings for firms near the threshold.

25
Q

What is the observed impact of a 10pp increase in institutional ownership on dividend yield?

A

It leads to a 1pp increase in dividend yield.

26
Q

Why is the effect of institutional ownership stronger for high-agency-cost firms?

A

These firms benefit more from the governance role of institutional investors.

27
Q

What types of firms show the strongest dividend increases with higher institutional ownership?

A

Stable, cash-rich firms with poor governance and low growth opportunities.

28
Q

What are the two key concerns when studying institutional ownership and payouts?

A

Reverse causality and omitted variables

29
Q

How does institutional monitoring complement dividend payments?

A

Both reduce agency costs by limiting managerial misuse of resources.

30
Q

What is the broader implication of institutional ownership on governance?

A

It strengthens oversight and aligns managerial decisions with shareholder interests.

Corp. Governance and CSR (16 decks)

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