Payout Smoothing and Investment Responsiveness
This study examines payout smoothing, its evolution over time, and its implications for investment policy. Though not to the same extent they smooth dividends, firms smooth share repurchases, and repurchase smoothing has increased significantly over the past four decades. Meanwhile, dividend smoothing has remained relatively steady, even slightly decreasing. To determine if payout smoothing restricts investment, we estimate plausibly exogenous changes in investment opportunities from changes in downstream production and investigate firm-level investment responsiveness as a function of payout smoothing. Firms that historically smooth payouts are significantly less responsive to investment opportunities, especially if prior payout levels are high. This finding even applies to the smoothing of "flexible" repurchases. Our evidence supports the notion that firms are willing to forfeit investments to maintain dividends and share repurchases.
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