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Journal of Financial and Quantitative Analysis Vol. 55 No. 1 2020

The Effect of Financial Flexibility on Payout Policy

Anil Kumar1,2,3,4,5,6,7; Carles Vergara-Alert

1 École Supérieure des Sciences Économiques et Commerciales · 2 Aarhus University · 3 IESE Business School · 4 Université Paris Dauphine-PSL · 5 Massachusetts Institute of Technology · 6 Syracuse University · 7 Universitat de Barcelona

open access

Abstract

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

DOI
10.1017/s002210901800114x
Volume
55
Issue
1
Pages
263-289
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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