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Do capital structure models square with the dynamics of payout?

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  • Lambrecht, Bart
  • Chen, Shiqi

Abstract

We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing. Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.

Suggested Citation

  • Lambrecht, Bart & Chen, Shiqi, 2021. "Do capital structure models square with the dynamics of payout?," CEPR Discussion Papers 16199, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16199
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    More about this item

    Keywords

    Payout smoothing; Capital structure; Pecking order model; Leverage target;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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