A Note On The Determinants Of Equity Payouts

Abstract

This study develops an equity distribution model to analyze dividend and share repurchase pay- ments to shareholders. Transaction costs increase and agency costs decrease as equity cash dis- tributions increase, suggesting that an optimal equity distribution exists that minimizes the sum of these two costs. A Tobit model relates the equity distribution yield (dividend and share repurchase distributions as a percent of market capitalization) to proxies of perceived undervaluation, finan- cial leverage, asset productivity, investment cash outflows, and agency costs. The results suggest that firms appearing undervalued, using little financial leverage, employing more productive as- sets, having fewer investment opportunities, or having greater dispersion of ownership distribute relatively more cash to shareholders through dividends and/or share repurchases. These findings support the existence of an optimal equity cash distribution policy that is unique to each firm.