The impact of uncertainty on payout policy

Abstract

Purpose The purpose of this paper is to investigate the impact of market-level uncertainty on dividend and repurchase decisions. Design/methodology/approach Using a large data set over a nearly 50-year period, the author examines the choice to pay dividends and repurchase shares using logit and multinomial logit regressions. Findings Market-level uncertainty (measured by a GARCH estimate of volatility, as well as the Chicago Board Options Exchange Volatility Index) is shown to have a statistically significant impact on firms’ payout policy decisions. This impact is different for dividends and repurchases as well as for firms with differing levels of cash flows. As market uncertainty increases, firms with low cash flow levels tighten dividend policy to conserve cash while firms with high cash flow levels become opportunistic through the use of share repurchases. Practical implications The findings allow investors to better understand the connection between shifts in market-level uncertainty and corporate payout policy, specifically through the differing use of dividends and repurchases. Originality/value While prior literature on payout policy has focused on firm-level determinants, this study demonstrates that market-level uncertainty impacts firms’ payout policy decisions uniquely. Furthermore, this is, to the author’s knowledge, the first study to differentiate by relative cash flow level, demonstrating that not all cash flow levels react in the same manner.

Political uncertainty, dividend policy adjustments and market effects

“…To reduce the probability of financial distress, managers tend to choose prudent dividend policies (Chay & Suh, 2009;Lintner, 1956;Walkup, 2011). Some papers also find that dividend policies adjust to the change of expected future earnings (Benito & Young, 2003;Darling, 1957).…”

Economic policy uncertainty and dividend sustainability: new insight from emerging equity market of China

“…Existing literature examined the link between uncertainty (see e.g., market uncertainty (Walkup, 2016), cash flow uncertainty (Chay & Suh, 2009), political uncertainty (Huang, Wu, Yu, & Zhang, 2015) and dividend policy. Klumpp (2017) argued that policy changes affect the economic outcome and the environment in which firm operates.…”

Mediating role of dividend policy among its determinants and organizational financial performance

“…Cash flow uncertainty affects dividend payout policy among agency conflict, investment opportunities, and capital mix (Chay & Suh, 2009). Walkup (2016) find that uncertainty significantly affects the firms' dividend payout policy. As market uncertainty increases, firms with low cash flow levels tighten dividend policy to conserve cash while firms with high cash flow levels become opportunistic through the use of share repurchases.…”