Payout Policy Choices and Shareholder Investment Horizons*

Abstract

This paper examines how shareholder horizons influence payout policy choices. We infer institutional shareholders' investment horizons using the frequency with which they turnover their overall stock portfolios prior to the payout decision. We find that the frequency and amount of repurchases increases with ownership by short-term investors, to the detriment of dividends. We also find that the market reacts less positively to repurchases made by firms held by short-term institutions. These findings are consistent with a model in which undervalued firms signal through repurchases, but firms held by short-term investors make repurchases more often because those investors care mostly about the shortterm price reaction. Hence the market rationally discounts the signal provided by such repurchases. Our findings suggest that shorter shareholder horizons might be one contributing factor to the increasing popularity of buybacks.

Investor Flows to Asset Managers: Causes and Consequences

“…Higher turnover of a fund's shares can shorten the horizon of the fund's investments, which, according to Gaspar, Massa & Matos (2005), leads funds to bail out early from stocks in takeover situations and thus removes the funds' votes from the outcome. Short horizons may also push funds to firms with more short-term strategies (Gaspar et al 2013), thereby encouraging short-termism among public firms, and they may encourage funds to leave investments with management problems, rather than to stay and push for changes (Parrino, Sias & Starks 2003). Indeed, Schwartz-Ziv & Wermers (2014) find that mutual funds with higher portfolio turnover-which is related to a higher volatility of flows-are less likely to vote against management on pay (the so-called Say on Pay vote).…”

Majority support of shareholders, monitoring incentive, and dividend policy

“…According to Chen et al (2007), independent institutions with long-term investment horizons are expected to have superior monitoring abilities. Gaspar et al (2013) report that institutions making long-term investments compel firms to pay more dividends. Apparently, our model provides a theoretical explanation for this phenomenon.…”

Signaling mechanism of corporate payout policy: A case of Indian firms

“…Thus, the investment horizons might be one contributing factor to the increasing popularity of buybacks (Gaspar et al 2012). Also stock repurchases were effective in countries with strong investor protection than dividends (Haw et al, 2011).…”