Excess Corporate Payouts and Financial Distress Risk
European Financial Management, Forthcoming
56 Pages Posted: 8 Feb 2016 Last revised: 19 Jan 2021
Date Written: September 10, 2020
Firms that follow excessive payout policies (over-payers) are higher on the financial distress spectrum and have lower survival rates than under-payers. In addition, over-payers endure lower future sales and asset growth than under-payers and experience negative abnormal returns in the bond and stock markets. Exogenous import tariff reductions and commodity price jumps reduce the likelihood of overpayment. We interpret this as evidence consistent with financial flexibility considerations, rather than risk-shifting, explaining the decision to overpay. We also find that CEO overconfidence and catering incentives affect overpayment.
Keywords: payout policy, financial distress, firm survival, over-payers, financial flexibility
JEL Classification: G32, G33, G35
Suggested Citation: Suggested Citation