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Financial Flexibility, Performance, and the Corporate Payout Choice

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  • Erik Lie

    (School of Business Administration, College of William and Mary)

Abstract

This study examines the effect of financial flexibility and the level and certainty of operating performance on the choice to change dividends, pay special dividends, and repurchase shares. Firms that increase payouts have excess financial flexibility and exhibit positive concurrent income shocks and decreases in income volatility, but there is limited evidence of subsequent performance improvements. The results are opposite for firms that cut dividends. Thus, the decision to alter payout levels appears to convey information about contemporaneous income and changes in operating risk.

Suggested Citation

  • Erik Lie, 2005. "Financial Flexibility, Performance, and the Corporate Payout Choice," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2179-2202, November.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2179-2202
    DOI: 10.1086/497043
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