Payout policy and cash-flow uncertainty

Abstract

The importance of cash-flow uncertainty in payout policy has received little attention in empirical studies, while survey studies such as [Lintner, J., 1956. Distribution of incomes of operations among dividends, retained earnings, and taxes. American Economic Review 46, 97-113.] and [Brav, A., Graham, J., Harvey C., Michaely, R., 2005. Payout policy in the 21st century. Journal of Financial Economics 77, 483-527.] indicate its importance. With worldwide firm-level data, we present evidence that cash-flow uncertainty is an important cross-sectional determinant of corporate payout policy. Our results show that across countries, cash-flow uncertainty, as proxied by stock return volatility, has a negative impact on the amount of dividends as well as the probability of paying dividends. The impact of cash-flow uncertainty on dividends is generally stronger than the impact of other potential determinants of payout policy-such as the earned/contributed capital mix, agency conflicts, and investment opportunities. We also find that the effect of cash-flow uncertainty on dividends is distinct from the effect of a firm's financial life-cycle stage. © 2009 Elsevier B.V. All rights reserved.